Chit Chat Stocks - Does Pacifico Airports Have an Impenetrable Moat? (Ticker: PAC) with Ian Bezek

Episode Date: December 8, 2022

Pacifico Airports manages, operates, and develops airports primarily in Mexico's Pacific region. The company's revenue is made through contracts, parking, advertising, and rental spaces inside the airport. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Ian's work? Check out their Twitter here: https://twitter.com/irbezek?s=20&t=sU7YZPBZj3fojwmC-ZqiUg Contact us: [e-mail] Timestamps Pacifico Airports | (4:05) Growth | (20:06) Valuation | (32:13) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive show where we interview an analyst on a single stock. And today we're talking with Ian Bezek on, oh, sorry, not Consorciora. That was the other Mexican company that was in my head. Pacifico Airports, which is, dare I say, one of the modiest businesses we've ever looked at on this show because, and you'll see why, but there's some clear competitive advantages and it's a difficult business to disrupt but what were your highlights from the interview i think the highlight was going through how they make money and how it's such an easy business to run once you have the toll on traffic through the airports and then the various reasons why pacific airports pack will say the ticker is pac for the american

one if people get confused i know it's harder to find the stock if you want to look them you know to look it up, but they're in Guadalajara, they're in Tijuana, both those areas, uh, Ian outlined why they will have, you know, should see traffic growth just because of various things within, uh, Tijuana, San Diego, and then with Guadalajara, the broader Mexican economy and the relationship with the government. It also surprised me. I would have thought for a business that is this durable and predictable, the valuation investors would have priced that in, but it doesn't seem to be too expensive of an evaluation

either. So it seemed pretty attractive all around, but we'll let Ian pitch it for himself here in a second. Do you want to talk about our sponsors first? Yeah. Let's talk about our sponsor for this week's show and through the rest of 2022. And that is 7investing. Use code money to get $100 off your annual subscription. If you're thinking of getting someone a Christmas gift that loves investing and loves investing research, this could be the perfect time to do it with our discounted code, $100 off your annual subscription. With 7investing as a member, you get seven research reports every month. And if you're listening to this, we're recording this before the start of December. But when you're listening to this, it will be during December.

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subscription for life. That's a 25% discount. Ryan, should we hit the interview? Yeah. Without further ado, here's our discussion with Ian Bizet. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital. And Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode.

All right, welcome in. Today, we are joined by first-time guest Ian Bezek. You may know him from Twitter. It's at Ian Bezek, I believe. And he also has a sub stack, Ian's Insider Corner. covers a lot of interesting stuff, something we owned as well. That's kind of what caught my eye and then saw some other work and ultimately came down to this. And we're talking about Pacifico Airports, which most of our listeners, I believe, are based in the US. So they may not have looked at an airport business model before. So why don't we start there? What does Pacifico airport what does their business model look like so like how does an airport exactly make money because it doesn't it doesn't feel that intuitive when i when i first look at it sure so there's two

main pieces for how an airport is compensated the first is aeronautical revenues which is contractual the mexican airports in particular have an arrangement with the government that give them the concessions that every five years they get an agreed upon rate um like it's around i believe 10 or 12 dollars per passenger depending on the airport uh they and they can charge that to every airline that wants to use the airport and then they get to raise the fee by x amount usually linked to inflation every five years and as long as the airport owner invests new capital in the airports in terms of like new runways and stuff they get to raise prices so that's your contractual revenues every passenger that shows up at the airport gets paid that's the fee on your ticket

like when you see it says airport fees that goes to the airport holder then the other part of revenues is the non-aeronautical revenues so this is anything else the airport can do to make money so think renting out spaces in the mall to sell food or to shops usually the charge rent and then maybe a portion of fees like five percent of revenues from a restaurant or whenever it was go to the airport you have parking uh in the case of pacifico i believe they operate a hotel at one of the airports there's uh they've been building like industrial like warehouses and stuff around the airports that they can rent out um so yeah you have advertising as the airports get bigger they've gotten better and better advertising contracts and so the the main growth driver

has been those non-aeronautical revenues kind of making more money from every passenger who been to the airport. Gotcha. And where, just for anyone listening, are their airports located? I know, you know, there's some in Tijuana, but I don't think they have as much exposure in Mexico City as maybe some others, but correct me if I'm wrong. Yeah, so the way it worked, Mexico used to own, the federal government owned the airports, and then in, I believe, 2004, they privatized them, and so they were privatized into four groups, and they're based by geography, so Pacific, as you might guess as mostly holdings on the west coast of mexico there's a north central one that has airports near texas and then there's the south group that has cancun and a variety of airports in

the south of mexico then the fourth uh group was mexico city but that one never listed stock to the public so there's three that are publicly traded uh pacifico in particular the flagship airport is guadalajara which is a city of five just over five million people i believe the second largest city and economic area in mexico so that attracts a lot of uh just friends and family travel just good it's like the second biggest city in the country so be the colon of owning like la or chicago in the u.s um you have tijuana which is a big industrial airport on the border with san diego california that's been growing uh really quickly because san diego only has one runway at the airport and so tijuana has been getting more and more flights it's kind of an

overflow airport for san diego because san diego is environmentalists have blocked the expansion of that airport so tijuana has been the biggest grower in their portfolio then you've got the two big tourist airports which are cabos and puerto vallarta okay and they have eight others that are smaller but those are the four like principal holders of the group makes sense uh i forgot to ask this at the start but maybe give a little bit of background for listeners who don't know who you are what how'd you kind of get into investing and then what sparked the interest for pacifical airports why how did you come across this sure yeah so i started uh my interest in investing came from uh middle school we had a stock picking contest for the whole state of

indiana where i was living at the time and we bought a bunch of tech stocks and came in third in the state and received a cash price and so i said oh this is really easy i'm gonna make my money doing this and then as i watched like all the stocks we'd bought like yahoo like crashed the next year maybe this isn't as easy as i thought that sparked my interest and then uh i opened a brokerage account the day i turned 18 and i managed my little college fund that money that i'd saved um traded that through the 2008 crisis which was an adventure uh some good some bad but uh that kind of got me going out of college i went to work for a hedge fund keresdale in New York for three years.

That kind of taught me the nuts and bolts of how to do good financial analysis to look for companies. But I realized I didn't really want to live in New York forever and moved to South America for a year to learn Spanish and fell in love and have stayed there ever since. Nice. And I guess, when did you first come across Pacifico Airports? Yeah, so I first bought stock in the company in 2016, right as Trump was getting elected. of the mexican stocks went down a lot and so that ended up being a very good opportunity a lot of

mexican companies fell 20 or 30 percent in a couple of weeks related to the trump election i was actually living in mexico at the time and i was looking around and like i would go to the mall business was normal it was just just walking around it's like nothing's really changed and yet all the foreign investors are like pulling all their money out of mexico i think there's an opportunity here so that's when i got involved in pacifico at first but then i've been a shareholder for six years now and just kind of uh grown to understand the business more and really appreciated i thought management did a great job running the company through 2020 pandemic brought the business entirely to a halt i thought they did a great job keeping things going

and so i've added to my position considerably so interesting and we're gonna get back to the the pacific airport but i just want you know for any a lot of listeners especially we you know have some european ones as well they're very scared of investing in latin america south america mexico what uh i guess what intrigues you about that and what are say like the big risks i guess any novice should watch out for as as they're going you know investing in mexico yeah i think there's good reason based on history to be skeptical of investing in Latin America. I'd say to pay close attention to how friendly countries are to business. You have some countries like Argentina and Brazil that have burned investors over and over and have very poor governance, very weak

rule of law. So I'd be, I wouldn't say don't invest in those countries, but I'd say use a higher discount rate, be more skeptical. Mexico has been stable for a good 20 years now. The central bank has been very responsible inflation has been among the lowest in latin america and they're very closely tied to the u.s now he just had the reworked uh usmca free trade deal you have a ostensibly left-wing president in mexico now but he's built even closer ties to the u.s i think just the mexico u.s relationship was so close at this point and it's really hard to conceive of how how mexico would fall the same way that like in argentina would gotcha now that makes sense all right back to i'm going to call it pack uh just as an abbreviation

pac what you know you see one of these and you think okay the land advantage is just huge i mean is that just giving them a great competitive advantage and is there a way anyone can compete with them in the specific geographies like say a guadalajara i think that's what makes airports so interesting not just pacifico in particular but any listed airport group is that they have natural monopolies um because generally you only have one airport servicing a city unless it's a very large city uh mexico city is the only city in the country that has more than one airport um and from what i understand there's no real possibility of a second airport at Guadalajara or any of the other second cities in Mexico anytime soon.

Just the costs, the environmental problems with creating other airports, the traffic, it's just no one wants a new airport built in their backyard, right? And so it's very hard to regulation around it. Unless you're talking about like a Sydney or New York or some world-class city, you might get new airports there, but I see the risk there being what you love. So in effect, I think you have an Appli asset. In a way, it's like the railroads, except with the railroads, you have a lot more CapEx because you have to maintain thousands of miles of rail lines, whereas with airports, you have to maintain one large building.

So I see it as even more attractive, more attractive version of railroads. Yeah, that should pique some investors. I don't know, because people love the railroads. And I guess if it's railroads, but less capital intensive, that seems highly attractive. Sorry, Ryan, you have the next question. Well, we're going to... And also, one more point on that. You have passengers, too.

With railroads, it's cargo. And cargo is great, but with passengers, you get to sell them drinks and gifts and cosmetics and stuff every time they go through the airport. So there's a lot more added monetization opportunities to owning an airport versus a railway. And they are basically, what, just leasing out their real estate to retail shops?

Am I getting that right? Is that kind of how the non-aeronautical revenue? Yeah, yeah. Essentially, you'd be like being a mall owner, office building owner, and that you maintain the facility and then you rent it out to whoever wants it. And generally, you charge rent plus maybe, depending on the property, you might charge a percentage of their concessions or their sales. right makes sense uh what are i guess i'm trying to think through the economics and from looking at the financials it's a really high margin business what are its actual costs yeah yeah typically uh i believe when they were spun out of or not spun out when they were privatized they were on 50 percent even out margins and over the years they've gotten closer to 70 percent even out margins because management has prioritized uh growing the

on aeronautical revenues, which are higher margin. Your biggest costs are kind of up front. Anytime you have to do new capital expenditures, like the Guadalupe Hedda Airport, they're spending $500 billion to build an additional runway and terminal that will more than double its capacity. And so shareholders have to come up with $500 billion up front. They're allowed to reimburse that through higher fees,

passenger use fees at the airport in the future. but there's still like you have to deploy the capital and then you'll get it back in five or ten years as capacity grows so you've got your big upfront expenditures to expand your airports then day-to-day costs you've got uh like security like you have to do all the passenger checkpoints uh electricity uh your utilities staff costs regulations lawyers people follow on your property you get sued whatever um you know just kind of the same stuff that being a landward would entail. Okay.

How much exposure does or do Mexican airports have to leisure travel? Is it more than other areas? It really depends. That's a good question. It really depends on the airport group. There's three that are publicly traded in Mexico.

The southern airport group, Tigger ASR, that one owns primarily the Cancun airport, so that one's virtually all tourist travel. like hardly anyone goes to cancun for business you go there for spring break so so that one's almost pure play tourism uh the centro norte is airports along the border with texas and so that's almost all tied to manufacturing like it'll be auto executives from detroit coming to visit their

plants uh in mexico so that one is much less tourist uh i think i like about pacifico is it's got the mix of the industrial and the tourists like tijuana is a very industrial airport it's all about business and integration with San Diego now but then you've got like Cabos and Puerto Vallarta which has just been huge tourist draws like in particular Cabos traffic has grown more than 30 percent since the pandemic started Mexico was one of the first countries to reopen actually they only shut down for three months during the pandemic so a lot of people started instead of going to other places in the Caribbean that went to Mexico just to give you an overall number prior the pandemic was 45 million um international tourist arrivals in mexico a year would be the

size of the market and then it looks like we're going to be about 20 percent bigger than that next year going forward so certainly the largest tourist destination that's spanish-speaking in the world gotcha and what have you seen any benefits in the numbers from say flexible work work from home because i know there's a big you know uh maybe it's a narrative or a lot of stories out there about you know u.s residents and other people around the world moving you know for some time of the year into the cheaper countries um what what well brett went i did actually do this yeah i went to mexico for a couple months there is a personal example of i'm helping the airport traffic uh through the work from home so have they talked about this i guess uh and are they

seeing any you know benefits that could be you know maybe a decade-long uh tailwind yeah i think it's possible i mean so far the biggest uh improvements pacific coast traffic is running about 25 percent of where it was in 2019 so well ahead of uh pre-pandemic levels but the biggest increases have been at the beach airports like cabos in particular and so i think maybe people pretending to work from home uh yeah i think you'd have to ask people if they're going to cabos if they're spending all day at the beach or if they're actually getting some work done from their Airbnb or not that's right well it doesn't matter it doesn't matter they make money either way yeah I think I think it helps I mean on the other end if people can do more video calls instead of

going to visit places in person that will hurt business to some extent so there's it's probably offsetting somewhere like Guadalajara has a lot of industry and if people don't go and visit their plants in Mexico as much, that would counteract some benefits from digital no-vents or whatnot. Would if we went into or I don't know if we're already, I don't know how

it's characterized, but if we were in a recession, would Pacifico Airport see or pack, let's call it, would they be hurt by it or are they somewhat insulated? I think they would a little bit, but they were publicly

traded in 2008, through that financial crisis, and traffic was only done mildly and fully recovered by 2010. Historically, global travel has grown at two and a half times global GDP, and with a large portion of that being emerging markets. And so I think you would need to see pretty steep negative GDP numbers to actually see outright declines. Keep in mind, the majority of actual Mexicans just traveling around Mexico still take buses. like if you look at the Mexico City

Guadalajara for example you have a bus leaving every five minutes that's an 80 hour bus ride and it's like 45 minutes in a plane so it's like these people should all be on planes it's a huge tailwind over call it the next 20 years

I mean it's happened to some extent you have discount airlines that have become significantly larger in Mexico but I'd say we're in maybe the fourth inning of that transition and that will offset a lot of even if international So travel takes a dip in a recession, just your continuing drive of the Mexican middle class emerging and saying, I don't want to ride buses for eight hours anymore.

It's going to be helpful in offsetting that. How does PAC grow? Can they do anything, I guess, to growers? Are they just sort of at the whim of more traffic flowing through the airport? yeah so they meet with the mexican government every five years to determine capital uh expenditure planning for the next five years um the mexican government will give them uh recommendations in terms of like from the mexican tourist agency whoever and saying like this stuff if you add these services at the airport will reimburse you for them so there's planning with the government

in terms of uh what they would find helpful and then pacific okinawa also plan its own like if they feel an industrial park at the airport would be profitable they can go build that themselves they're building like I said they're doubling more than doubling the size of the Guadalajara airport that they're spending 500 million dollars on which is quite large by their 7 billion market cap now and I think it was like 600 million of annual profits spending almost a year of profits on an airport enlargement so pretty big internal reinvestment there um what else can they do they bought back a little bit of stock they pay a large dividend they aim to pay more than 90 percent of free cash flow as dividends uh so the yeah that gets rid of

excess cash uh they have bid on other airports they picked up two concessions in jamaica which are not large in the grand scheme of things but it's a little bit additional growth have they have they said anything about moving more internationally uh or yeah i guess have they said anything about that yeah yeah so i actually talked to the cfo this summer and he said that they've been involved in several bidding processes throughout latin america but they've tended to get outbid because they're conservative and some certain other airport operators have been willing to pay higher prices where they didn't see the math pencil out but they continue bidding i believe they're bidding in barbados now for the airport there so

they like you said they're always always looking but they they they don't want to overpay gotcha and what's their the most important thing here is the you know the take rate i guess you might want to call it that uh on the volume and the relationship with the government i mean how good is how strong is that relationship is there any risks there and are they also inflation project that just kind of came up you know when we're talking about the the price escalations yeah um i'd say the relationship is pretty good there was some concern about this because in 2018 mexico elected a left-wing president which had ended several decades of continual pro-business rule and the new president had uh kind of made some decisions particularly related to energy

in a couple of areas that concerned people and so there had been some uh some nervousness and analyst community if they were going to get good um good treatment on their next five-year deals but pacifico completed theirs in 2019 and it was just status quo uh and then with the pandemic the mexican government gave some sweeteners to the airports to kind of compensate them for lost revenue so relationship has been good i'd say if anything the take rate is probably at the high end of what makes sense i spoke with the ex-cfo one of the discount carriers in mexico and he said that that their biggest problem with expanding is just that the airports are taking so much of the profit compared to the airlines and when they set up new routes in like Central America or South America

that it's much more favorable to the airline but the airports are so well compensated that it makes it more difficult to add new routes in Mexico which is bad news for the airline good news good news for the airports but I would say the focus should be on growing the non-aeronautical revenue so uh more parking more more shops more advertising more hotels uh that sort of stuff because i think i think if you charge too much for the airport you're going to slow down growth pretty considerably in terms of how many new routes you get this is probably one of the most profitable businesses sorry and i didn't get your inflation inflation yeah i think it's yeah go on they get contractually the mexican inflation rate minus i believe 0.5 percent a year for

added efficiency uh so cpi is like six percent in mexico they'll get a five and a half percent increase to their rate uh yeah that's nice it is probably one of the most profitable businesses i've ever looked at but do you think there's any room for them to continue growing profitability or is it probably is you mentioned you mentioned right yeah yeah you mentioned that uh they're kind of on the high end do you think there's any chance that like margins will revert yeah so up until the pandemic they'd been operating in the high 60s even at margin i believe one of their competitors hit 70 in 2019 and that in my opinion seemed like the high end of what they're ever going to be able to achieve i mean so 70 percent even at margin really how much

more upside can we expect however the airports did say they cut some expenses during the pandemic and they were able to renegotiate contracts and all and one of their competitors has posted a 72 margin uh the last quarter so it's possible they've managed to find another 100 200 basis points of upset that's what i think just at this point i mean the assets are so well optimized as this i would say just focus on growing your top line you have other publicly traded airports one group out of argentina and a couple of groups out of europe and their ebitda margins are in like the 50s and so i'd say the assets are well optimized and just figure out where you can put more capital uh to work with in the existing assets or or maybe buy more assets in the caribbean

or latin america could so is i'm trying to think about like them expanding their footprint airport wise you you mentioned the international strategy could they build their own or is that just kind of out of the question they have to acquire different airports um occasionally uh like mexico is um building a new airport in the mayan riviera that i really call it near tulum and so uh in theory there could be bidding for that although in this case the government decided to build it themselves uh so like if if the government says we're opening up a new area for tourism and we're going to invest a lot of capital here who wants to build the airport that would be an opportunity um aside from that i mean most cities already have an airport so you just

expand the one that's there instead of building an entirely new one the biggest opportunity in the mexican market is the mexico city is tapped out the main international airport was built for 40 million people and it's now at about 45 million annually meaning that it's over capacity delays have been going up like if you have any weather it will get backed up all day because every slot is used and so like any delay like turns into a big mess like and so airlines don't want to add and can't add any more routes to mexico city and yet the overall demand for mexico keeps going up and up which means that the airlines are having to add routes in other airports just because simply there's no you're just you can't add more mexico city and so this is particularly

good news for guadalajara because they're just turning it into a second hub that's what kind of cfo has said is if the mexican government the mexican government doesn't want to build a new airport in mexico city because they said the environmental damage would be too great and the traffic like they'd have to build huge new highways and everything so they're just like we're sticking with what we've got and so that creates an opportunity to use the focus cities like guadalajara as as a second hub and so the pac is looking to take guadalajara from 15 million passengers now to 40 million passengers in 2040 so long term and so yeah if they succeed on that that uh that would uh new that would add like 50 to the company's profitability base

just from that what about the uh the tijuana san diego bridge now i i've never uh used the bridge but it sounded it kind of sounds weird to anyone who hasn't been on it so is this just like a bridge from airport to airport that people can walk across am i getting that right yeah so the tijuana airport is actually located right on the border with the u.s like if you look at it on the satellite map the actual border of the property is like the wall between uh tijuana and san diego and so and san diego's airport only has one runway and they've been blocked from building a second runway and obviously that economic area that metro area has growing a ton and so one of the logical solutions has just been we'll fly to Tijuana and then people

can drive to into San Diego but that used to be a pain and because it'd be like an hour to cross the border with security and whatever and so Pacifico got approval to build a bridge that just goes out into a parking lot on the San Diego side of the airport it's still run by Pacifico but it is a parking lot and then you can just order an uber you can park the parking long-term for passengers who order an uber and just go straight into san diego in like 20 minutes to downtown so you land in tijuana get out take an uber from san diego you never have to set foot in mexico how how much has that helped uh that their their tijuana airport grow yeah so i think when they built that the airport was like four this is off memory but like four

million passengers a year and now it's over 10 million passengers a year it's been growing like 30 percent a year compounded most of that's through the bridge tijuana was the 11th busiest airport in all of latin america last year which is just crazy like it's ahead of like uh capital it was ahead of buenos aires for example which is just wow why would that happen but yeah yeah i saw i also saw that argentina's really yeah i saw argentina's like terrible treats like their fees on airlines are really bad you probably know it's better than me but maybe uh i don't know that's another example of that but sorry did you uh did you have anything else to add on that before the next question uh no just yeah they've uh tijuana probably doesn't seem like a great asset on the

face of it and yet they've managed to do something pretty amazing with it uh prior to the pandemic i don't know if this will come back but they had a director out from china to tijuana which was just incredible from my vantage point like i wouldn't i mean prior to looking into this i never would I would have imagined that Tijuana would be receiving cross-continental, cross-ocean flights. Yeah, that is surprising. What's their relationship with the U.S.? Is that important at all? Because I know there's a lot of traffic coming from that country.

Yeah, so the regulation is all on the airlines, not on the airport specifically. That said, this is one risk to the airports, more to the airlines. But the FAA downgraded Mexico from status one to status two of flight safety, which limits the amount of new routes that Mexican airlines can operate into the U.S. U.S. airlines can still open whatever new routes they want into Mexico, but the Mexican airline industry is greatly slowed down from adding new frequencies into the U.S. until they get their flight control back to tier one. And I don't understand why it's been delayed so long. It has something to do with the pandemic and the Mexican government not understanding how to clear up the situation. But that's been a limitation. Not a huge deal because it's more airlines like Southwest and Spirit that have been driving more growth than Mexico anyway.

But something to watch. But no, Pacifico doesn't have to interact directly with the U.S. This sounds kind of like sort of an ideal business model. so what uh what is the business trade at what kind of multiple are investors putting on this yeah so typically for airports people value them on enterprise value to ebita because the concessions could come in at a lot of different prices like if somebody is theoretically paid five billion dollars for their concessions and somebody else paid a hundred million then you'd be like one group would be depreciating like 500 billion dollars a year the other group

would be depreciating like $5 million. So the earnings would be way different, even though it wouldn't matter to the people buying today. So people usually use EBITDA for emerging market airports. You tend to see them in the $12 to $15 range, although Thailand has an airport group that's public that was over $20 prior to the pandemic. In developed markets, airports usually trade over $20 times EBITDA.

But in Pacific Coast, at around $11 now. It's actually lower than it was trading prior to the pandemic because EBITDA has gone up 50% since 2019. And the stock price has not gone up 50% yet, although we're working on it for the past few months. But yeah, so I think the longer term Pacific Ocean trade goes sort of like 15 times EBITDA EBITDA, which would be like 30% upside from here.

But then EBITDA historically has compounded like 15% a year. So you get to add to your upside pretty quickly. If you do want to look at it in earnings basis, I believe it's what, 16 times now, which i don't usually think about it in an earnings basis but it's not uh it's not expensive on that metric uh the other way to think about it would be through free cash flow uh and then like i said they pay out basically all of the free cash flows dividend and so it's been yielding uh it was yielding like seven or eight percent at one point but i believe the yields in the

fives now which is still a pretty attractive uh for people that want growth and income than an investment. Yeah, definitely. What are your thoughts on their capital allocation strategy? Is it a positive, negative that they're paying so much out as a dividend? How do you look at it when valuing stock?

Yeah, I think the management's been very responsible with their capital. Mexican companies have tended to have a reputation for just piling up cash so that management can engage in whatever sorts of other business like you have lots of mexican holding companies i think they're

breaks your pathway but end up assembling just collections of junk so i really appreciate that instead of hoarding capital or making a lot of investments into questionable infrastructure assets i just said if we can't find something better to do with our cash we'll give it to you in dividends like i said i spoke with the cfo and i asked him at the end just like what makes you different from other emerging market investments that you might look at and he said that we strive to have like the highest dividend yield in Mexico and we maximize our free cash flow so that we can reward our shareholders I think that's a very rare trait in emerging market businesses that the focus is on on the shareholders and not on enriching management yeah like I said they've

been very conservative in bidding for other airports the deal they paid for the Jamaican airports was was attractive compared to other airport transactions we've seen and i think i have confidence that if they do buy other airports that they'll come at a reasonable price would you rather see them take some of that money and put it into buybacks right now given it sounds like they they're trading that maybe uh cheaper multiple than they they have historically yeah yeah it's a little cheaper that has been historically i think yeah it was medians like 14 15 over the past decade uh yeah i think buybacks would be fun that's a i mean as long as i keep dividending out all the cash like the actual ev tends to i mean

i think it works out well for shareholders either way as long as the cash doesn't pile up because like as long as you keep paying out all the cash is dividends then all of your equity is in the business not in just stuff on the balance sheet so uh there have been some argument that They should take on more debt because most airport groups are highly levered and they were less than one time levered going into the pandemic. But that ended up being a very fortunate turn of events for them because some of the other airport groups had to raise capital at unattractive valuations in 2020. I don't know, there's probably still going to be people saying they should use more debt to buy back stock or to buy more assets. But I think they're pretty content at one time, steady, but given the volatility of both Mexico and the airline industry. Gotcha. All right. Last question here. This seems like a low risk investment, but we want to do a pre-mortem.

How could an investment in PAC go poorly, say, over the next five, 10 years? yeah so i had uh across the different airport groups uh that was one of my largest positions going into the pandemic and so i i'd never imagined that i would see my airport holdings down 70 two weeks uh but that's what happened in march 2020 oh wow that's uh yeah pacific was trading at uh like 140 150 140 i think prior to the pandemic and then it was 50 like two weeks later uh oh gee yeah and centro norte was at 65 and then it bottomed at 19 like two weeks later uh so i think that was quite the stress test in terms of uh whether these uh how these would hold up hey that's that's really like you had no revenues for three months and then you had very

marginal revenues for the next year a year and a half before things really got going again but yeah obviously anything that uh any sort of terrorism or war or anything that would bring traffic to a halt is the biggest problem airlines going bust might seem like a big risk but we actually we game plans that went out in mexico as well or we ran that scenario because mexicana was the second largest airline it failed in 2010 uh pacifico lost less than a month of revenues from failure to collect so it's i mean any you can lose a month no one cares and within 18 months all of that traffic was replaced by discount airlines and so it's uh same uh same same amount of business different uh different pictures on the tails of the airplanes but

so that was fine uh anything that permanently ruined relations between the U.S. and Mexico I'd say that one's been stress tested as well because we had President Trump and he was saying some very nasty things about Mexico for a while and yet there's more American tourists in Mexico now than ever uh but you never know um usually people complain about currency you guys haven't asked about currency at all yet uh right right yeah well we know we're in yeah we are we are mexican stock the dividend kind of helps there but yeah the dividend does help yeah yeah and then and the the thing with currency with an airline is that with an airport is that if the value of the mexican peso goes down you'll get more tourists and travelers who come to take advantage

with a cheaper country so you may have a year where you you make much less profit than normal due to bad currency translation but ultimately a cheaper mexican peso drives more traffic so i think that's much less of a risk to an airport than to most other uh mexican enterprises uh if oil it looked like for a few weeks there in march of this year oil was going crazy i mean if jet fuel is like ten dollars a gallon that's not good for airports uh you'd rather own the airport than to the airline but it's still bad news like if if oil becomes uh crazy expensive trickles through to them do you think carbon uh if you have some sort of carbon tax or like people just say airlines are bad because of their environmental damage i'm just throwing out like low low probability

but things that could really hurt the thesis uh yeah that's the main stuff that would concern me right i think that's all the questions we have it's it's going to the i think the top of my watch list um and it's traded on american exchanges if i'm not mistaken yeah i guess we should just reference uh as i'm looking today market cap eight billion dollars uh in u.s dollars so this isn't a tiny company by any means because i know a lot of people get worried about that when investing in emerging markets yeah dual listed with the new york stock exchange and they have investor presentations in english they report financials in english in dollars so yeah i mean it's also listed in mexico but there's plenty of volume on the u.s side it's

owned in like the mexico etf and a variety of other latin etfs so there's passive money and institutional money involved all right well i think that's gonna do it uh for people that want to keep up with you or see more of your work see any other stocks that you look at what's the best place to do that yeah so i'm active on twitter i got quite a few followers there i are basic i are b-e-z-e-k and then i'm seeking alpha or my sub stack ian's insider corner same name same uh same articles at both places but whichever platform you prefer i met both of them uh but Yeah, I'm on Twitter all day. So if you got any questions on Pacifico

or anything else I've written about, just hit me up there and I'll be in touch. All right, we'll be sure to link to those in the show notes as well. But that is going to do it. So we want to remind our listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money

is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thanks again, Ian, for coming on the show. and we will see you all next time. Hey, Simon, we wanted to ask you a few questions

about 7investing so listeners could get an idea of what they're getting. What inspired you to start the company and what exactly is 7investing? Well, hey, Ryan. Thanks again for having me. From years of working in the investing industry, it was inspired by conversations with people that would just always have the same negative perception of the stock market. It's too hard, or I don't have time for this, for this to stack

against me. Those conversations led me to say, hey, we need to create a site that actually does inspire people to say, you can take control of your financial future. You can invest in stocks, you can find good stocks to buy and hold for long periods of time. At the end of the day too, we know that everybody is different. We don't believe that there is one stock that fits for everyone. Maybe you're a dividend loving, paycheck cashing income investor that might want an option that's going to be a lower risk dividend paying stock, especially right now with the economy being what it is. And then other people might say, hey, I'm ready to hold on for 20 or 30 years. I want to take some swings for the fences. Let's go after those high growth opportunities. And so I said,

this could be something that would be even more fun rather than just doing educational and by myself. I said, what if I brought together a team of seven advisors, all with a diverse background and a diverse perspective of the stock market so we could uncover more stones and look at a bunch of different stocks with a bunch of different investing styles and a whole bunch of different industries. And so seven investing is kind of the genesis of all of those that we started in March to 2020 and we said, let's look at a whole bunch of different stocks. Let's do the legwork of the analysis and let's present our seven favorite actionable ideas every month for investors to choose from. And let's start the conversation about which of these stocks is right for you

and which one might be the right fit for your portfolio. Knowing that investing is a very personal thing. All right. If you are a subscriber of 7investing, what do you get? Can you give an overview of what subscribers get. On the very first of every month, Brett, we release our seven new recommendations. So we are coming up on October 1st here, at least in the recording of this. And on October 1st, we'll release seven recommendation reports. Some of them will be low risk. Some of them will be high risk. Some of them will be biotech. Some of them will be financial services. We run the full gamut. And as a member, you get immediate access to all of the new reports. But you also get access to all of our old recommendations as well. We track all of

them in real time on our scorecard at 7investing.com slash recommendations. And we also provide company updates on all of those previous recommendations as well. We check in on how things are going. And sometimes we even see red flags that we think people should be aware of. There's risks for any opportunity at the time that you recommend it. And sometimes it's really needed for investors to understand the risk and reward relationship. Then the last part of it is, in addition to issuing new recommendations and providing updates on them, is we know that this is a long-term journey. We know that investing is something that we want to take years, if not decades, to accomplish whatever we want to get to as the end goal. We always, every month,

make it a point to be very available for our subscribers to ask us questions. We have a members-only call right in the middle of every single month. We have a community discussion forum that we have available 24-7 to not only talk to our advisors, but also other investors. I think that's one of the key differentiators for 7investing is that we know this is a long-term journey. We know it's a very personal thing. We know they're going to have questions along the way.

We don't want to just broadcast stock picks and disappear. We want to be here with you throughout this entire journey. And you mentioned, so seven recommendations each month. Sometimes those might be repeats, but obviously there's a lot of companies now in the 7investing universe. So how do members get a grasp on the advisor's conviction around certain ideas? Like which ones do they, do they have a way of knowing which, whether advisors like certain ones more? That's the most common question we've gotten, actually, since we started is, what's your favorite ideas right now? We've done the diligence on almost 200 unique companies now and put them on the scorecard. And people would say, hey, this is too much to keep up with. How do I even know where to start? And so we've kind of evolved as a company. One thing that we've started doing is best buys every month. Each advisor gets to pick any of their or another

advisor's previous recommendations and put the flag on it that says, this is my best buy for October. And we publish those for subscribers. The other thing that we've started doing is issuing conviction ratings on companies that are also right there on the score card. So if you see a previous recommendation, we go everything from potential sell, which is the most negative flag we can put on a stock, to strong buy, which is the most positive bullish flag that we can mark things with. And you can filter through all of those to really quickly see here's some of our favorite opportunities. And we've taken this even one step further now, Ryan, which is we've created a strong buy portfolio where every quarter now we've gone

ahead and self-selected as a team through a pretty methodical process, our 20 favorite ideas, our 20 highest scoring companies that we've collectively come up with, our favorites of the entire scorecard. And we put these into what we're calling a strong buy portfolio that we publish each quarter. Also available as an added benefit for no extra charge for seven investing members. All right. Last question here. What does it cost to become a 7investing subscriber? And as we'll talk about, or we have talked about before, if you're a listener, use code money to get $100 off your annual subscription. That's right. We do have a monthly option. You can come in and check out the entire scorecard

for a month just to see what you're looking at for $49 a month. But our most popular plan is actually the annual option because it's at a discount to that. In fact, we've got a discount on the discount, like you mentioned, Brett. $399 for the year is our annual option price. But if you use money, the Chit Chat Money promo code, it's down to $300. So you're basically getting the subscription for half price if you sign up for the annual offer with that promo code. That does not expire after the first year. As long as you remain an active subscriber, you get to lock in that $100 off a year benefit. All right. Well, as he mentioned, use that code money thanks for joining us Simon thanks very much for having me don't you wish you

could just hit skip on the worst parts of your life you know the same way you can skip an ad I get it I'm Siaya and I live in Ice Cove I've made some questionable decisions that didn't end up the way I planned and today I'm still figuring it out somehow things usually get worse before they get better apparently that's how I roll so bundle up and come along for the Bumpy Ride. Stream a new episode of North of North Tuesdays on CBC Gem.