Are Copa Holdings, S.A. (NYSE:CPA) Shareholders Getting A Good Deal?
Two important questions to ask before you buy Copa Holdings, S.A. (NYSE:CPA) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, CPA is currently valued at US$4.1b. I will take you through CPA’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
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Is Copa Holdings generating enough cash?
Copa Holdings generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
The two ways to assess whether Copa Holdings’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Copa Holdings also generates a positive free cash flow. However, the yield of 0.71% is not sufficient to compensate for the level of risk investors are taking on. This is because Copa Holdings’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for Copa Holdings?
Does CPA’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, expected growth for CPA’s operating cash is negative, with operating cash flows expected to decline from its current level of US$503m. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. Breaking down operating cash growth into a year-on-year basis, it seems like CPA will face a continued decline in growth rates, from 0.01% next year, to -13% in the following year.
Next Steps:
Copa Holdings’s low free cash flow yield is deterring, in addition to its negative growth prospects. This means that, as an investor, you would be rewarded less than just holding a portfolio made up of all the stocks in the market, as well as taking on higher risk! Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Copa Holdings to get a better picture of the company by looking at:
Historical Performance: What has CPA’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Copa Holdings’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
