Grupo Aeroportuario del Pacifico (ADR) (PAC), Grupo Aeroportuario del Centro Nort(ADR) (OMAB), Grupo Aeroportuario del Sureste (ADR) (ASR): Three Geographical Monopolies in Mexican Airports

With the world economy recuperating, air travel increasing, and the Mexican GDP, in particular, growing at above average rates, its airport businesses are worth a look. Grupo Aeroportuario del Pacifico (ADR) (NYSE:PAC), Grupo Aeroportuario del Centro Nort(ADR) (NASDAQ:OMAB), and Grupo Aeroportuario del Sureste (ADR) (NYSE:ASR) are three major airport operators in Mexico that enjoy geographical monopolies. Widely moated, some offer compelling growth prospects and are worth our money, especially if you plan on going long. Let’s take a closer look.

The main operator in the Pacific & Central regions

A result of the privatization of Mexican airports, Grupo Aeroportuario del Pacifico (ADR) (NYSE:PAC) controls all of the air travel in the Pacific and central regions of the country, operating 12 airports. With a concession that will last until 2048, the firm seems like an interesting long-term investment opportunity; its moat couldn’t be wider, there is just no competition. Of course, the contracts demand Grupo Aeroportuario del Pacifico to present development and reinvestment plans every five years in order to maintain the rights of exploitation.

Traffic has been consistently increasing in its airports over the past few years, mostly due to the increase in air-travel made possible by low-cost airlines. On average, the traffic has increased by about 5% every month over the past 12 months. Another fact to highlight about Grupo Aeroportuario del Pacifico (ADR) (NYSE:PAC)’s traffic is its diversification. With roughly 30% of the total travelers going through its most important airport, its dependence on it is quite limited, therefore limiting its risks, as well.

Furthermore, the company has focused on higher margin activities over the past few years, managing to lift its unregulated commercial revenue from 17% of the total revenue in 2004 to 23% in 2012 (Morningstar). Particularly, car parking and leases have helped drive the operating margin to an impressive 42.7%, well above the 11.6% industry average, and the net margin to 35.8%, versus the industry mean of 9.2%.

With outstanding financials, a clean balance sheet with a great debt to equity ratio, a 5.16% dividend yield, and an average 9% expected annual growth for five years to come, I’d say that this stock is a buy and hold case, even though it is trading at 20.1 times its earnings, but still below the 21.7x industry mean.

Grupo Aeroportuario del Centro Nort(ADR) (NASDAQ:OMAB): Controls the center region

Another big beneficiary of Mexico’s airport privatization is Grupo Aeroportuario del Centro Norte, which holds an operative monopoly over the center of the country. However, it manages more airports than any of its local competitors. Therefore, the mix is not as regular as in Pacifico’s case. Some airports experience little traffic while others have massive circulation. In this last category, the firm operates Monterrey’s airport, third largest in Mexico and one of the two extremes in the country’s busiest air route, Monterrey-Mexico City. However, the company is highly dependent on this airport, as it contributes almost 45% of its total revenue.

Just like Grupo Aeroportuario del Pacifico (ADR) (NYSE:PAC),  Grupo Aeroportuario del Centro Nort(ADR) (NASDAQ:OMAB) is widely moated due to the 50 year concession contract. Meanwhile, organic expansion has been doing much for the company. On one hand,
commercial revenue, with higher margins and lower governmental regulations, has grown from 16% of total revenue in 2004 to 24.4% in 2012 (Morningstar), providing Grupo Aeroportuario del Centro Norte with the most attractive non-airport asset base. On the other hand, the firm opened a hotel at Mexico D.F. airport, the busiest in the country, which has already started adding to revenue, accounting for 6% of the total in 2012.

Expected to deliver double-digit earnings growth in 2013 and 2014, averaging about 11% over the next five years, I’d recommend keeping a close eye on this company, especially as its management has shown creativity and an innovative force that will most likely drive growth in the upcoming quarters. Although it trades at 22.4 times its earnings, a little above average, if price were to descend, a very attractive window of opportunity would open, and you wouldn’t want to miss it, especially as the projected dividend yield reaches 9.35% and its robust cash flows are able to sustain it.

Grupo Aeroportuario del Sureste (ADR) (NYSE:ASR): Operates in the South region

Third in the list is Grupo Aeroportuario del Sureste (ADR) (NYSE:ASR), that operates the southern airports of Mexico and enjoys of a monopoly status in the region, like its peers above. However, it is the least attractive among the three.Some analysts had been recommending buying this stock due to its high margin commercial revenue, its ventures outside of Mexico, including that of  Luis Muñoz Marin International Airport in Puerto Rico and its control of Cancun’s airport, which has been steadily increasing its traffic. Strong financial results and wide margins, 50.2% operating margin and 38.9% net margin, back this position. However, I would advocate on holding on this firm for now.

With roughly three out of four passengers going through Grupo Aeroportuario del Sureste (ADR) (NYSE:ASR) airports through Cancun, the firm’s dependence on this facility is too high. Furthermore, it accounted for 80% of its total revenue. This makes it highly vulnerable to seasonality and tourism rates in the city. The company is also substantially susceptible to the effect of climatic phenomena, especially hurricanes, and to variations in fuel prices.

Consensus estimates project a 4.4% annual growth rate over the next five years. Expected to considerably underperform its peers, I feel quite discouraged to buy. Furthermore, its valuation makes it even less attractive as it trades at 21.3 times its earnings. Overvalued and underperforming, the company hasn’s got much, in my view, against its two aforementioned peers.

Bottom line

Trading just around the industry average valuation while offering compelling growth prospects and juicy dividend yields, backed by strong cash flows and a monopoly status that should last at least another 35 years, I’d recommend
buying Grupo Aeroportuario del Pacifico (ADR) (NYSE:PAC) and Grupo Aeroportuario del Centro Nort(ADR) (NASDAQ:OMAB)before they appreciate even further.

The article 3 Geographical Monopolies in Mexican Airports originally appeared on Fool.com.

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