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Tickers in this Article: PAC, ASR, OMAB, FRNTQ
My last visit to Mexico was in 2006 to Puerto Vallarta, I don't remember much about the trip but I do know the airport was less than spectacular. While it wasn't the most beautiful place in the world, they did manage to get us on our way quickly. The company that operates the Puerto Vallarta airport is Grupo Aeroportuario del Pacifico (NYSE:PAC) or Pacific Airport Group. Here we'll take a closer look at this promising company. (Get the full story before you write them off as too risky, in Re-evaluating Emerging Markets.)

Grupo what?
There are actually four "Grupos" in the Mexican airport game. In 1998, SCT, the ministry responsible for transportation in Mexico identified 35 airports suitable for private investment. They were divided into four groups:

  • Grupo Aeroportuario del Pacifico
  • Grupo Aeroportuario de la Ciudad de Mexico (currently the Mexico City airport only)
  • Grupo Aeroportuario del Sureste (NYSE:ASR)
  • Grupo Aeroportuario del Centro-Norte (Nasdaq:OMAB).
The investment process called for public bids to secure a minority interest in each of the groups. Once completed, the government would sell the remainder of its ownership stake in each group through an initial public offering (IPO). The first part of the sale came in 1999 when a consortium of Mexican and Spanish investors formed AMP, a Mexican company, to buy all of the Class BB shares. The $261 million bid gave it 15% of the outstanding shares. The Mexican government owned the remaining 85% until February 27, 2006, when it went public, closing up 37.9% in its first day of trading. Since then it's traded as high as $57 in October 2007 and never lower than the $21 IPO price. (For further reading on initial public offerings, be sure to check out our IPO Basics Tutorial.)

There's Money in Airports
If you want to fly anywhere, you need an airport to depart from and another to land at. Millions of passengers fly in and out of airports, and so the companies that run them have a potential printing press on their hands. In Pacific's case, it owns the right to operate 12 airports for 50 years - a deal that began Nov. 1, 1998. SCT can extend this for one or more 50-year terms. It makes money by charging passengers, airlines, retailers and restaurants for use of the airport facilities. In 2007, revenues were P$3.48 billion, up 14.2% from 2006 and operating income up 23.5% to P$1.58 billion. Both good but more impressive is the 340 basis point increase in the operating margin to 45.5%.

PAC Better Than the Pack
In terms of revenue, Pacific Air Group is bigger than both of its competitors. Pacific Group generated P$3.48 billion in 2007, compared with P$2.79 billion for Grupo Aeroportuario del Sureste and P$1.9 Billion for Grupo Aeroportuario del Centro-Norte. Same thing for its operating margins where at 45%, they're four percentage points better than the former and nine the latter.

Pacific Air Group also has its competition beat, generating 31.1% from its largest airport in terms of traffic. The other two rely on 69.8% and 46.2% of revenue from their largest airport. It operates six of the top ten airports in Mexico in terms of total passengers including Guadalajara, the third busiest, which generates 33% of the revenue and 39% of the operating profit. Its top four airports: Guadalajara, Tijuana, Puerto Vallarta and Los Cabos accounted for 79% of company revenue in 2006. With two airports in metropolitan cities and two in resort towns, it's the perfect balance. (Find out more in our related article Analyzing Operating Margins.)

Bottom Line
Operating airports isn't always glamorous, but in my opinion, they make great investments. Between 2001 and 2007, Pacific Airport Group's revenues and EBITDA grew 9.8% and 11.2% annually. Year-to-date traffic is up 7% despite everything we're reading about the sky falling. Management provided guidance in the first quarter that said 2008 would see traffic increase by 5-7%. So far, they're right on.

The only fly in the ointment seems to be the pending Chapter 11 filing by Frontier Airlines (OTC:FRNTQ). If it goes under, both the Los Cabos and Puerto Vallarta airports will lose approximately 5% of their annual traffic. Despite this looming threat, I believe the $2 dividend (a 6% yield at current prices) is too good to pass up.

To learn more on this great distribution, read The Importance Of Dividends.

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