Copa Holdings Management Has A Credible Plan To Boost Margins: Buckingham

Buckingham sees potential 30 percent upside in Copa Holdings, S.A. CPA shares as it reiterated its Buy rating and raised its price target to $116 from $92 on prospects for strong margin growth.

At its investor day, the company said revenue and cost initiatives will likely contribute 4-5 percentage pts to margins through 2019, with a 19 percent operating margin "easily" achievable – all else equal.

"At this point, new cost initiatives are behind the 100/200 bps improvement to our operating margin outlook for 2017/2018, with pre-tax earnings in our model now rising at a 41% CAGR, leaving us 15%/19% above consensus respectively," analyst Daniel McKenzie wrote in a note.

The analyst noted that the company could achieve normalized earnings of $10.50, perhaps as early as 2018, if an economic recovery in LATAM ever takes hold. If that happens, shares could touch $145-$150 over the next 1-3 years.

McKenzie also raised his 2017 EPS outlook to $6.80 (vs prior $6.15 / consensus $5.91) and 2018 outlook to $9.00 (vs prior $8.00 / consensus $7.55) to reflect the management's margin improvement initiatives.

The company plans to save $50 million through 2018 worth about 2 percentage points to margins. On the revenue side, ancillary revenue initiatives are worth about 3 percent points to margins in 2018.

However, McKenzie highlighted that "Premium Economy and a bag fee are likely worth 4% to operating margins alone (or $1.65 to shares and $23 to the stock)."

In addition, the analyst projects dividend of $1.78 in 2017 (2 percent yield) rising to $2.74 in 2018 (3 percent yield), a 54 percent increase.

At time of writing, shares of Copa Holdings fell 1.78 percent to $88.98.