The Company Behind this Stock has a Monopoly for the Next 36 Years
In 1998, the Mexican government decided to privatize the country's main airports. This became a major windfall for three publicly traded airport companies and its investors.
As a result, these airports were granted concessions to operate the airports for 50 years, which limited competition. As long as these companies lived up to the government's standards, these three companies were set to rake in huge sums of cash over the next five decades. And one company in particular has lined investors' pockets with average annual gains of 20% for the past 15 years.
The revenue from regulated fees accounts for about two-thirds of the company's total revenue. It has nine designated airports, one of which is the second-busiest airport in Mexico (Cancun). The company has practically monopolized Southeast Mexico, as travelers must connect through its airports when flying in the region.
Better yet, theis in place until 2048, which is exactly the kind of reliability that has allowed the company to pay generous dividends to shareholders -- and this is all on top of the robust stock gains it's experienced.
No wonder StreetAuthority co-founder Paul Tracy holds this stock in the Reliable Income Portfolio of his High-Yield International newsletter.
The company I'm talking about is Grupo Aeroportuario del Sureste or ASUR (NYSE: ASR).
ASUR was created in 1998 following a decision by the Mexican government to privatize some of its airports. It generates revenue from various airport fees and commercial services, which includes car parking and retail sales.
The company's regional monopoly over tourist-heavy Southeast Mexico has created a financial windfall for this company, generating returns of 20% or more per year. This has led to a strong dividend as well as growth potential for a company often overlooked by investors.
Air-travel in Mexico was particularly strong in 2007 and the first-half of 2008 as low-cost carriers became popular. But the oil spike in 2008 and global recession led to bankruptcies of many Mexican airports, which slowed airline travel. But even with this weakness, the power of the airport operator's monopoly shined through.
The stock dipped in the last quarter of 2008 but saw a robust recovery in 2009. Coincidentally, that's when High-Yield International's Paul Tracy bought the stock. By 2011, the company's performance returned to peak levels. Today, Paul -- and readers who followed his advice -- are sitting on a 145% gain.
ASUR has had an impressive run the past few years...
The company is expecting another banner year in 2012. The Cancun airport, for example, had a record 13 million passengers in 2011 and is poised to have even more in 2012.
ASUR should continue to see steady, long-term passenger growth because of its strong Cancun geographic location. Additionally, unregulated, high-margin commercial services such as airport parking and retail sales should aide profitability. Yet one of ASUR's greatest strengths is a scalable cost structure. This allows it to have strong margins and the ability to generate additional revenue from incremental passengers above its fixed-costs.
ASUR recently announced it will be the private operator of the Luis Munoz Marin International Airport in San Juan, Puerto Rico. The joint venture with Highstar Capital IV (each have a 50% stake) is named Aerostar Airport Holdings. Annual traffic for this airport was nearly 8 million passengers in 2011. That is more than twice the amount of all of ASUR's airports combined (with the exception of Cancun). This further diversifies ASUR's revenue, allowing it to have less dependence on Cancun, which had accounted for 74% of its revenue.
ASUR has a net cash position of about $800 million and converts more than a quarter of its revenue into free cash flow, even with its hefty capital expenditures. Top line gross revenue margins were around 65% at the end of 2011, with ASUR taking in $4.5 Billion. Operating margins are currently in the mid 50s but have been expanding closer to 60%. Non-regulated commercial revenue has grown over the past decade from 25% of total revenue in 2003 to over 35% in 2012.
One of the key drivers for ASUR's success has been high-margin commercial sales such as airport parking and retail sales. This higher margin trend should continue to be a major focus for ASUR over the next several years.
Risks to Consider: ASUR's greatest risks include weather, Currency risk is also present as its international customers take between 30 and 120 days to pay airport fees, and changes between the U.S. dollar and Mexican peso exchange rate can impact short-term profitability. Lastly, because ASUR is an airport, airline bankruptcies can increase the cost of collecting on accounts receivable and potentially decrease future revenue if other carriers do not replace bankrupt carriers.fluctuations and airline exposure. Hurricanes pose a risk because Cancun's location is in the eye of the summer storm season.
Action to Take --> Buy Grupo Aeroportuario del Sureste, (NYSE: ASR) up to $92 a share. This stock has delivered investors returns of over 20% a year for the past 15 years, and this trend should continue. With a healthy 3% dividend (paid yearly, which is common for non-U.S. companies), this airport is a great way to receive cash flow now (from the dividend) as well as strong growth potential in the years ahead.
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StreetAuthority LLC does not hold positions in any securities mentioned in this article.