I’ve covered Mexican airport operator Grupo Aeroportuario del Pacifico (NYSE:PAC) extensively over the years. Shares have returned 150% since 2017 when I first highlighted the company. And shares have outperformed the S&P 500 by 24% since December 2021 when I gave my refreshed post-pandemic thesis on the company. I’d refer back to my previous work on the company for a comprehensive look at all the catalysts, drivers, and risks associated with Pacifico stock.

Rather, the point of today’s article is to highlight that Pacifico stock is still cheap and attractive. In fact, it’s rather surprising that shares aren’t up more. The business’ fundamental growth is now outpacing share price growth. In other words, PAC stock is up, but it should be up more.

The centerpiece of the valuation argument for Pacifico — and the Mexican airport operators more broadly — is based on an Enterprise Value to EBITDA basis. Given that airport operators have significant depreciation associated with their various airport lease contracts and subsequent improvements to airport assets, EBITDA is generally a better valuation gauge than earnings in the industry.

Generally, the Mexican airports traded in the low to mid-teens range — think 12-15s in the 2010s. This trailed developed markets airports, which often go for 20x+ EV/EBITDA. Even other emerging market airports such as Airports of Thailand (OTCPK:AIPUY) have historically traded north of 20x EV/EBITDA.

So if I argued Pacifico and its peers were too cheap at 12.5x EV/EBITDA before, you can only imagine how excited I am about the airport operators as they drift down to around 10x EV/EBITDA now.

As you can see, Pacifico is nearing its cheapest valuation since the financial crisis. Excluding the 2020-21 pandemic period where Pacifico’s trailing EBITDA was not reflective of its forward business prospects, the only times Pacifico shares were cheaper than this were small portions of 2010, 2011, and 2018.

This might seem weird at first glance. After all, Pacifico stock is near all-time highs.

So how is its valuation so low on a historical basis if the stock price is up and to the right?

Simply put, EBITDA has grown even faster:

I don’t think investors appreciate just how incredibly well the Mexican airport operators have responded since the pandemic. Just look at the slope of that line since 2021. EBITDA has already topped pre-pandemic levels by a wide margin and growth is continuing at a sizzling pace, as we’ll see in a minute.

How’d this happen? For one, the airport operators were able to negotiate favorable contracts with the current Mexican government — contrary to analyst worries — and thus improve margins on the pricing side of the equation. Throw in some strong cost-cutting during the 2020 period, and the airport operators have exited the crisis with structurally higher profit margins than before.

Meanwhile, top-line revenue growth is blisteringly fast. That, at the heart of it, comes down to the fact that Mexico placed fewer travel restrictions on folks due to the pandemic than most other markets. The Mexican hospitality industry remained open for business and was able to steal market share from rivals. Even as other tourist markets have started to reopen in earnest, Mexico has been able to hold onto its gains as new travel patterns and experiences formed over the past two years.

Pacifico’s Stunning Passenger Numbers

It all adds up to a breathtaking set of traffic numbers for Pacifico’s collection of airports:

The above table shows Pacifico’s traffic numbers for April 2022 versus April 2019. We aren’t comparing against weak quarters from 2020 or 2021 here, but rather against how things were faring at peak performance right before the pandemic started.

Compared to April 2019, Pacifico’s system-wide traffic rose from 4.1 million to 4.7 million passengers, or 15.3%. Notably, this is accelerating traffic growth. As the columns on the right show, Pacifico’s year-to-date 2022 traffic is up 8.3% versus the same period of 2019, meaning that April’s passenger growth is picking up steam even further from the rest of 2022 so far.

Leading the surge is Tijuana, which is up more than 35% versus 2019 figures. As I’ve previously documented, Tijuana has been a huge winner thanks to its relatively new cross-border bridge, which allows passengers to land in Tijuana and disembark directly into the U.S. From the airport, passengers can pick up their vehicle or ride-share and be in downtown San Diego in a matter of minutes. Given the significantly more restrictive Covid travel rules in the U.S. along with capacity constraints at the San Diego airport, Tijuana has been picking up more and more overflow for that urban area as a whole.

The next big winner has been the up-and-coming tourist destination that is Cabos. Anecdotally, I’ve seen more social media buzz for Cabos since 2021 than just about any other Latin American destination. The close, quick flights from California and relative lack of Covid-19 restrictions at Cabos have made it one of the biggest winners in the international travel landscape recently. Traffic was up 24% for April 2022 versus the same period of 2019.

Pacifico’s other big tourist draw, Puerto Vallarta (pictured at top) is also up 24% versus April 2019. It had originally been slightly slower to recover than Cabos since it is generally aimed at a wealthier and older clientele than Cabos. Vallarta has a lot of American and Canadian retirees who own homes in the area. After an initial bit of reluctance toward traveling, however, this traffic has now come roaring back.

The only real drawbacks in the traffic report are minor. Guanajuato/Leon is primarily an industrial airport serving a key manufacturing region in central Mexico. Like Centro Norte’s (OMAB) stable of industry-focused airports, Guanajuato hasn’t seen the business travelers get back to full speed quite yet. Also down versus 2019 is Montego Bay (Jamaica), which has been hampered by that country’s more restrictive pandemic policies.

Finally, it’s worth commenting on Guadalajara, which is Pacifico’s largest and most important airport. As Guadalajara is Mexico’s second-largest city, it has lots of traffic from business, friends and family, and tourism. This makes it more of a blend on all factors that affect Mexican air traffic. Not surprisingly, its traffic is in the middle between the pure industrial and pure tourism airports. However, notably, traffic crossed back into positive territory in April 2022, as Guadalajara is just now starting to top its prior peak traffic levels.

PAC Stock: The Outlook

Pacifico is now growing traffic at a double-digit clip versus its prior 2019 peak levels. This traffic growth is continuing to accelerate. This summer is likely to produce more blowout numbers for the company. And, given improving margins, Pacifico will turn even more of its revenue into EBITDA and free cash flow than ever.

Recall that Pacifico typically pays out nearly all of its free cash flow as dividends, so this rapid increase in profitability should also turn into a large increase in dividends as well.

I believe that Pacifico — and the other Mexican airport operators — should trade closer to 15x EV/EBITDA given their strong profitability, rapid traffic growth, and proven resilience through the worst industry crisis in decades. Unlike many other travel stocks, the Mexican airports are already producing record-high profits and are back at their all-time high stock prices. If this is how they manage through a global pandemic, imagine a few quiet years where Mexican stocks outperform amid 4% local GDP growth and a stable political backdrop.

15x EV/EBITDA today gets to a PAC stock price above $200/share versus the current $145 quotation. And looking out into the future, Pacifico seems set to grow passenger traffic at least 10%/year for the next couple of years. That level of traffic growth should deliver at least 15% EBITDA growth, since Pacifico is generally able to grow EBITDA more quickly than the top-line. This is because as airports grow, you get more scale effects; greater passenger volumes allow you to get higher-quality advertising deals, restaurant operators, on-premise hotels and the like.

In any case, I see fair value of at least $200/share today, and that figure growing in the 13-17% range compounded for at least the next few years. That makes shares a deal at current prices.

I realize Pacifico might seem odd as a travel recovery play since Mexico has long since reopened and Pacifico’s stock price is already up a bunch. However, as I’ve argued above, fundamentals are actually improving even more quickly than investors’ perception of the situation. In other word, this jet has a lot more climbing to do before it reaches its cruising altitude.