Expanding Global Footprint And Financial Discipline Propel Airline Toward Bright Horizons

Key Takeaways

• Geographic diversification and positive passenger traffic trends in specific markets hint at more stable and potentially growing revenues.
  
• Strong cash flow and low leverage ratio signal financial stability, potentially boosting investor confidence and positively impacting earnings.
  
• Challenges including macro-economic issues, cargo revenue declines, regulatory vulnerabilities, CapEx plan dependency, and foreign exchange rate volatility are threatening growth and margin stability.

Catalysts

Through its subsidiaries, acquires, develops, and operates airport concessions.

• Geographic diversification providing resilience against market-specific challenges, likely leading to more stable and potentially growing revenues in varying economic conditions.
  
• Positive passenger traffic trends in Italy and Uruguay, indicating potential for revenue growth in these markets due to increased international traffic and the opening of new routes.
  
• Strong cash flow generation and a record low leverage ratio demonstrating financial discipline and stability, potentially attracting investor confidence and impacting earnings positively.
  
• Ongoing negotiation of a $400 million CapEx plan with the Armenian government and the approval process for a new master plan for Florence Airport, indicating forward-looking growth initiatives that could expand operational capacity and revenue opportunities.
  
• Strengthening of Argentina’s regulatory framework through recent open skies bilateral agreements, which may boost international traffic and consequently increase passenger use fees linked to U.S. dollars, positively affecting revenues.

Assumptions

• Analysts are assuming Corporación América Airports's revenue will grow by 12.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.3% today to 20.1% in 3 years time.
• Analysts expect earnings to reach $424.4 million (and earnings per share of $3.45) by about November 2027, up from $357.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $687.2 million in earnings, and the most bearish expecting $315 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.0x on those 2027 earnings, down from 8.6x today. This future PE is lower than the current PE for the US Infrastructure industry at 8.6x.
• Analysts expect the number of shares outstanding to decline by 8.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.88%, as per the Simply Wall St company report.

Risks

• Macro-economic challenges in Argentina, impacting domestic traffic and operational costs, could strain revenue and increase operational expenses, impacting net margins negatively.
  
• Declining cargo revenues, particularly in Argentina, due to reduced storage days, indicating potential issues with cargo volume sustainability or pricing strategies, adversely affecting earnings.
  
• Vulnerability to aircraft constraints and regulatory changes in key markets such as Brazil, which may lead to decreased flight availability, impacting passenger volumes and revenue.
  
• Dependency on the execution of new CapEx plans, such as the negotiation with the Armenian government and the master plan for Florence Airport, which, if not finalized or delayed, could hinder growth projections and capital expenditure efficiency.
  
• Foreign exchange rate volatility particularly mentioned in the context of duty-free sales in Argentina, posing a risk to revenue predictability and margin stability due to potential cost increases or revenue decreases in local currency terms.

Valuation

• The analysts have a consensus price target of $21.32 for Corporación América Airports based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.5, and the most bearish reporting a price target of just $17.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.1 billion, earnings will come to $424.4 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 8.9%.
• Given the current share price of $19.14, the analyst's price target of $21.32 is 10.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.