Chit Chat Stocks - I Bought The Highest Quality Stock In Mexico (And It Trades At 10x Earnings) Ticker: OMAB

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Starting point is 00:01:26 is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Stocks. This is our monthly research episode. I'm one of your hosts, Ryan Henderson, and as always, I am joined by Brett Schaefer. For these episodes, either Brett or i digs deep into a stock they want to research they might already own it we might already own it i should say or we might be looking to own it and the company that we are discussing today or i should say brett is discussing is a local monopoly trading at a cheap valuation especially relative to the type of companies or type of valuations you would find here in the united states it's based in Mexico. And most people will probably not recognize the name if you primarily invest

Starting point is 00:02:23 in the US, but there are a lot of characteristics to like about this business, a little tease there. But I guess, Brett, do you want to talk about what the company is? Yeah, that's a good tease, Ryan. Thank you everyone for listening today. Yes, this is the first stock research episode of 2025. Ryan will have one coming up here shortly, and we'll do these regularly throughout the year. This is a stock I own, and it is one of the Mexican airport operators, Grupo Aeroportario del Centro Norte. We're not going to annoy the listeners with my bad Spanish accent, so we're just going to call it OMAB, which the ticker of the stock is O-M-A-B in both the United States and on the Mexican Stock Exchange. So we're just

Starting point is 00:03:10 going to call it OMAB. And that's where you can buy the stock if you want. I think people who have been listening to the show regularly will not be surprised that we are talking about another Mexican stock. Because I think compared to the United States, where we're seeing the S&P, what is the PE probably still above 30? Although we're recording this the day that NVIDIA went through a crash. So who knows, maybe the valuations come down a bit. Either way, It's right around 30. And I think there are high quality businesses in Mexico trading on the cheap and that OMAB is one of them. Before we get into it, if you liked this episode, if you enjoyed this research report, if you enjoyed any other ones, please give us a review

Starting point is 00:03:53 on Apple Podcasts or Spotify. And specifically with the stock research episodes, we are doing a free research report on our newsletter on Substack. There's a link in the show notes. you can also chat with us in our little community chat there. It's on Substack. It's going to be called the Chit Chat Stocks Podcast Substack. So let's get into it, Ryan. Before we do, let's say shout out to what I call our Latin American correspondent, Ian Bezek over at Ian's Insider Corner. That is a newsletter. He put this name out there. This is the first person I saw other people cover it, but he's the person that's covered it the most extensively. He's who inspired me to look at the name. And yeah, why OMAB? Why did I buy OMAB in my portfolio? Why was this the

Starting point is 00:04:41 latest stock I bought? As Ryan mentioned, it's monopoly trading at 10 times free cash flow. I think it can grow earnings at a double digit rate for the next decade. And it consistently returns all its excess cash flow back to shareholders. So it hits all three of the criteria of my list, which is high quality business, so wide moat stock, cheap valuation, and a management team I can trust. And I'm not going to talk specifically about the management team too much here, but the fact that they return essentially all their excess cash flow back as a dividend, well, that's better than 98% of management teams out there. And I think that kind of introduces it, Ryan. Why don't we, for anyone that doesn't know, Ryan kind of interviews

Starting point is 00:05:31 me throughout these research reports, and we do vice versa when Ryan does these. So let's get started. I think that's a good enough intro. Yeah, and I'll just reiterate that. Our sub stack, we do a lot of communication with listeners there, and we publish our written reports there as well for free. Everything on there is totally free. We're doing these notes anyways. We figure we'd get them out in the universe in written form also. So yes, once again, go ahead, check out Chitchat Stocks. But let's talk OMAB. I guess people that, first of all, if you're an investor in the United States, you don't really get the benefit of investing in United States airports, but you probably think, wow, these are decent businesses. There's not very much competition. So I guess, how was OMAB formed and what do they actually own? Okay. In 1998, the Mexican government opened up its airports for private investments. And I think

Starting point is 00:06:30 as investors, we should be ever grateful because as Ryan mentioned, it would be nice if we could do the same thing in the United States, but that's just not how things work over here. We have the opportunity to invest in this government sanctioned monopoly that looks like it's well on its way. I think to being a hundred beggar, it is already a 15 beggar since going public in 2006, if you go on a total return basis. In 2006, so again, in 1998, they privatized it. In 2006, the Mexican government sold around half of the stock to investors and listed the stock on the United States and Mexican stock markets. The money they sold went to the, or excuse me, the shares they sold, they got cash, went to the Mexican government, which is,

Starting point is 00:07:10 I think, why they did that. And just as a note, OMAB does not own these airports. They don't own the land there. They just have a long-term contract, which we'll get into, to operate the airport and have a deal with the government where they'll pay them a little bit of a take rate, almost like a franchise model, but they get to operate them, invest money into the airports, and they earn a return on that, almost like a utility. OMAP owns 13, or excuse me, I say operates, not owns, operates 13 airports that we can separate into various categories. They have one major hub, which is Monterey, and that's about half its traffic. That's really the only one that matters here, although we like the rest of the bucket here to do at least adequately.

Starting point is 00:07:54 They have three tourist hubs that are smaller ones. They don't own Cabo or Cancun or Puerto Vallarta, but they own Ceuadaneo, Acapulco, and Mazatlan. And then they own seven smaller cities in the north of the country and two border towns, Juarez and Reynosa. Since 2006, they've been focused really on growing volumes commercial sales and when i say commercial sales that's essentially the restaurants or the retail shops within the terminals and then any sort of profits it can make from adjacencies to airports they own a hotel they have an industrial park for cargo stuff and shareholders have appreciated this growth it's been a 16.8 annual total return since 2006 making it one of the best performing stocks of the last two decades yeah i've got the

Starting point is 00:08:42 chart pulled up here. I've said this before, but sometimes people take a chance with emerging markets and they talk about a business where things haven't been going well or the proof isn't there for it to be a good business, but maybe it's so undervalued that it could. That is not the case here. Well, maybe the undervaluation is, but in this case, there are historical returns you can look at where you can at least get a little bit of confirmation that this has been a great investment for a lot of investors in the past. And yes, you are looking at it there, basically a 1600% return since I believe 2007. So really solid returns. Let's talk about the relationship with the government. You mentioned that this was

Starting point is 00:09:25 privatized and purchased, I guess, by the OMAB. What was it? Private investment firm at the time. It was sort of, I imagine, some sort of collection of investors pulling money together to put this business into the private markets. Yeah, I think so. Yeah, yeah. It must have been a government-public partnership, almost like we just had this talk about that Project Stargate. I'm sure it was something like that where the government's sponsoring it. So there's a relationship there, but they're trying to turn it into a publicly traded company. Okay.

Starting point is 00:09:59 So maybe explain the relationship a little bit more. talk about the MDP, which is important. And most people probably do not know what that is. And then the actual long-term operation contract. Yes. So you'll see MDP mentioned throughout all writings, reports from them. So we'll talk about that and what that means, because there can be confusion for those that are looking at it for the first time. Again, OMAB doesn't actually own these airports. They have a contract with the Mexican government to manage them until 2048. I have a full quote from the annual report that explained this, but I'll just have to say the start here.

Starting point is 00:10:33 Quote, pursuant to the Mexican national assets law, all real estate and fixtures in our airports are owned by the Mexican government. Each of our concessions is scheduled to terminate in 2048, although each concession may be extended one or more times for up to an aggregate of an additional 50 years. The key points of the contract are that the existing operating contract goes until 2048, so about 25 years left and that the contract can be renewed for another 50 years to hopefully keep the party going some people look at this and say well what happens in 2048 there's some pushback there and they go the mexican government they like to have state-run companies they have a

Starting point is 00:11:19 little bit of a socialist bent i don't think that's a reason to stay out of the stuff the Mexican airports, at least the private Mexican airports, have greased the wheels of the Mexican economy and have been doing a great job at it. They grow traffic, they grow volumes. It seems like they're very happy about it. Unlike the Mexican City Airport, excuse me, Mexico City Airport, which is run by the Mexican Navy for some reason and does really poorly. These companies like OMAP, make the government a lot of money. And I don't, as long as this continues, I see no reason why they would change relationships that's working so well. But either way, it's 2048 when the contract ends. There is a, I guess, non-zero chance the contract

Starting point is 00:12:05 will not get renewed. I think it's a low number though. And even if that happens, we're going to go through the numbers today. We still make money. If we look at any of the blue chip companies out there, there is a chance that Apple stock is a zero in 2048, right? It's 25 years. That's a long time. Think of a hold you will be in 2048. If this is the biggest risk facing the terminal value of the business, I think I'm happy to take that risk. Now, the second thing investors need to understand is the cycle of what is called the master development program or MDP. So every five years, OMAP is required to submit an MDP to the Mexican government. An MDP outlines traffic forecasts, capital expenditure plans, and maintenance for the following 15 years. And once the MDP is

Starting point is 00:12:53 finalized, OMAP is given the right to raise its fees charged at the airports. They have the right to invest along the outline of this plan, similar to the utility. And like a regulated utility, the more OMAP invests in an airport, the more it is able to earn in fees. And then what's part of this MDP, is the negotiation of like the, say, per plane that arrives, like how much you get per passenger that arrives. So we've seen with the Pacifico airports, they just renegotiated it and saw a huge bump due to inflation. So they kind of just give a plan similar to utility, and then they're going to earn it over the next five years. And then each five years, they renew it, make a new plan, kind of give an economic environment, what they're seeing with traffic, stuff like that.

Starting point is 00:13:39 The Mexican government, I think, enjoys this because they can earn more in taxes and they have airports that can run well, unlike Mexico City. If we look at the 2023 annual report, which is the latest one we have right now, OMAM has invested and is slated to invest a total of 15 billion Mexican pesos or about 750 million USD into its airports from 2021 through 2025. The new MDP, and this is an important reason that I think the stock is attractive today. The new MDP will come into effect in 2026, which I think OMAB is probably negotiating today or will finalize this year. And what has happened in the last five years, Ryan? Inflation.

Starting point is 00:14:21 So we should see this take into effect with price increases on the slotting fees for planes at all its airports. And we can already see this with the Pacifico Airports Company, another publicly traded stock. I think it's PAC for the ticker in the United States and GAPB for the ticker in Mexico. I own that one as well. They just negotiated its updated MDP for 2025 through 2029, and it saw huge increases in its slotting fees. There's a quote from its press release, and they said, the maximum tariffs per workload unit for each airport were determined by the AFAC based on projections for traffic, operating

Starting point is 00:14:56 costs, and capital investments, including in the master development program, as well as the reference values and discount rate following the parameters established blah blah blah blah essentially they're saying based on the costs out there at the moment we're going to raise the slotting fees so what i'm saying is that omad should get the same treatment and that's right now they're sitting on um it's government determined but there's a lot of untapped pricing power that's going to be coming in shortly. So that leaves one question, Ryan, I think, is what will passenger traffic look like at OMAP? Because if so, I think given the high likelihood that OMAP's MDP is attractive going forward, I think if traffic increases, earnings are going

Starting point is 00:15:48 to grow at a pretty attractive rate yeah i think that's a fair assumption the other thing that's maybe going on in listeners heads here is you heard basically they don't own the land they have a management operation agreement until 2048 if they renew from there it's another 50 years and so maybe you're there's some sort of a hurdle in your head thinking well you know because there aren't a lot of other companies that have like this basically it's a 75 year lifespan potentially you don't think about businesses as having that you think it kind of just grows indefinitely but think about the number of companies that have existed for 75 years so if you're worried about terminal value being zero after 75 years guess what that's kind

Starting point is 00:16:35 the case for most companies so i yeah i wouldn't worry too much about it now you've got 23 24 years until the contract renewal with the mexican government in 2048 if this were trading at a super premium you may want to worry about that because then you you're not sure whether or not you're going to get paid you're not going to get enough dividends in time for it to be worthwhile, and maybe the math becomes a little more complicated. But given the valuation today, I don't think that is a concern. We'll get to that in a second, though. For now, why don't we talk about how the airport actually makes money? I don't know if it's all that intuitive for a lot of people since, like I said, here in America, we don't analyze

Starting point is 00:17:23 airport business models that often. So how does one actually generate revenue? Yeah, it's a good question. And I know for any listeners, that was a long lead in with the government contracts and stuff like that. So we'll try to get into it now. But I think that context is important for understanding how this business operates. So we know that they have the government concessions, the MDP agreements. And after that, I think the business model makes a lot more sense for an OMAP. Here's a clear snippet from them from the annual report. As operator of the 13 airports under our concessions, we charge fees to airlines, passengers, and other users for the use of the airport's facilities. We also derive rental and other income from commercial and diversification activities conducted at our airports, such as leasing space to restaurants, retailers, the operation of parking facilities, the operation of the OMA cargo business, the Terminal 2 collection hotel, and Hilton Garden Inn Hotel at the Monterey Airport, among others. So again, they make money when a plane uses its airport, aeronautical revenues, when a retailer like a duty-free rent space in the terminal, which is commercial revenue, and then some adjacent businesses like cargo and a hotel. Now, let me note when reading the reports, there's going to be a line called construction

Starting point is 00:18:37 revenue. However, these are just cost of improvements to concessioned assets and are equal out to cost on the income statement. So they just net it out. I don't know why they include this. it's not going to generate a profit or anything, but I think they are put in there to outline exactly what is spent. Almost like, again, the regulated capital expenditures along with the MDP plan and go, okay, well, we're doing what we thought, or maybe it's a little bit less,

Starting point is 00:19:00 or maybe it's a little bit more. And then that is, I guess, how they track it from an accounting standpoint. Another note, I'm not going to read the full quote on this, but international revenue is collected in US dollars. It's not the largest part, but it's a decent chunk of the business, but the majority is still domestic traffic. So again, all of this comes down to increasing traffic at the airports. If you get more passengers, you get more fees paid by the airlines for departures. If you get more people in your airport, you get more commercial revenue. And here's what segment revenue looks like for OMAP going back to 2012. We have aeronautical revenue in, I think this is pesos, growing at a 12.9% annual clip, even with the pandemic

Starting point is 00:19:43 interrupting things in 2020. That's from 2012 to the last 12 months. And then we have non-aeronautical revenue growing at 13.1%. That chart will be in the show notes that are in our newsletter. And both have grown at around 13% per year in Mexico. So it's not bad. However, I would expect actually non-aeronautical revenue to grow even faster once Monterey becomes more of a hub because you're going to have just more commercial businesses at an airport. Just think about when you visit a small airport. Is there much at the terminal? Not really. But when you go to a giant hub, there's going to be a lot of stuff there. And I think there is going to be a step change to adjust for inflation with the new MDP. So this should mean revenue grows actually faster than

Starting point is 00:20:33 traffic growth in the coming years. And I think faster over the next five years than they have over the last. And then once we look at the revenue, we have to look at costs. As we mentioned above, the construction costs are excluded by negating them with construction revenue. It's again, the investments into the concession assets. I'm not sure exactly why it's created like that. Again, it creates confusion looking at the profitability of OMAP, but I think it's because they don't actually own the airports. It's like, okay, well, we're investing into land and this is what we're going to get. In 2023, OMAP generated 14.46 billion pesos in revenue and generated 8.1 billion pesos in income from operations, or a 56% operating margin. However, if we exclude construction costs, operating margin rises to about 70%. Regardless of how you like to kind of pencil it out, this is a highly profitable business that is able to generate profits well in excess of their maintenance, operational, and overhead

Starting point is 00:21:31 costs. This also includes the concession tax paid to the government. When looking at these costs, I will be watching closely to see if this new MDP or any amendments leads to worse profit margins. But I think they've been able to maintain about a consistent 70% operating margin during a period of high inflation, engine slowdowns affecting volumes, which we'll get into, and the government amending the MDP to cut the extra fees earned during COVID. I think we can expect them to continue earning a 70% operating margin at a larger scale in the coming years.

Starting point is 00:22:09 Is that any confusion there, Ryan? Because the way I'm trying to look at it is they earn that 70% margin, but that's almost working back of what the government is allowing them to earn, if that makes sense, within the contract. Yeah, I think I follow. So it's not very intuitive in terms of why they report construction revenue. Just ignore it. Honestly, just ignore that. Yeah. So the operating margins here that I'm sharing, once again, I assume Brett used FinChat pretty much all throughout this episode for a lot of the data.

Starting point is 00:22:45 That's what we're using here. And we have a link in the description if you want to get a paid plan on discount. But yeah, so it's basically 54%. It's gone up over time from 2004, it was at about 31% operating margins, bottomed, still very profitable, looks like in 2009. And now it's jumped to around 54%, but that's encapsulated in the construction revenue, or I should say the construction costs, I guess, which is, if you ignore it, basically 70% operating margin. And to reiterate what Brett said on the business model part, the airlines pay every time they park a plane at your airport. That gets passed through in your airline ticket, I assume. Yeah, I actually have just purchased a ticket to Mexico the other day and – not the other day, a couple of months ago, and I noticed that they had those fees in there.

Starting point is 00:23:46 And I was like, well, as an owner of the stock now, maybe I'm not too upset about it. But yes, it is included in your ticket price. And hey, passengers are going to pay. So this is, it's pretty much the process universally. So it's like when you pay, if you ever wonder why airline tickets are rising, the price of airline tickets are rising, among other reasons, that's probably one of them is the airports typically get the ability to raise prices. in this case with inflation and it's going to be negotiated i believe on a five-year basis

Starting point is 00:24:19 um so if if inflation has been really hot and they're going into a renewal maybe you may want to book that trip uh before the mdp gets uh gets sent in here let's i don't know but here's the thing though ryan the specific one already got updated it goes from say ten dollars per person to 15 so for u.s travelers it's not that big of a deal it's not going to be a huge impact to your ticket price yeah essentially there's you can call it toll road income where they're putting a toll on the airlines and really the passengers and there's rental income essentially from the retailers and anyone that's uh renting out the various uh retail locations and then they also run like hospitality businesses that don't really account for a big part of it. But the hotels that

Starting point is 00:25:16 they mentioned, the parking, I guess that's not really hospitality, but they're operating that land as well. So I think that's pretty clear. I think that all makes sense. To kind of just go over one more number here really quick, and maybe I can share my screen again. The operating income, because we talked about the margin expansion and the revenue growth. Revenue growth over the last 10 years, aeronautical and non-aeronautical, so that's just the passenger toll road plus the rentals, that's grown at about 9% to 10% annually over the last 10 years, I believe. Operating income over the last 20 years has grown at a 13% CAGR, so that operating margin expansion is kind of shining through there. Yeah, and it's grown quicker recently since 2014 to the last 12 months. Even with the slowdown over the last 12 months, it's grown at 19%. So we've seen quite the acceleration for OMAP. And again, we'll get to the renewal and how that can impact it, but we should see an acceleration and step change over the next couple of years. Yeah, and I imagine this is just purely the operating income. If we looked at this on a per share basis, I imagine it's even higher. So kind of factor that in as well. But have they been doing buybacks recently?

Starting point is 00:26:43 They've done a little. They've done a little. Not recently. They're mainly dividend-focused, which I like just given the fact that with the terminal value risk, it's better to have the dividends coming back to you. It makes any difficult decisions easier, if that makes sense. Yeah. It gets rid of some of the inflation – or not inflation, sorry. Currency. It's kind of a currency hedge essentially unless you're reinvesting. But nevertheless, let's skip to the next question here. this is you've labeled your question here an easy to understand competitive advantage guaranteed high return on invested capital let's walk through the roic maybe explain it a bit in terms of what they're investing and what their guaranteed returns are why it's a guaranteed quote-unquote guaranteed return um and i don't know essentially why they generate high roic This episode is brought to you by our friends at Yellow Brick Investing. Yellow Brick is an aggregator of the best stock pitches across the internet.

Starting point is 00:27:48 By tracking thousands of blogs, newsletters, fund letters, podcasts, and more, they collect and summarize the best stock pitches and bring them to you in a single place. If you are a regular listener to Chit Chat Stocks, you know that we use Yellow Brick every single week here on the podcast to discover new investments or maintain existing coverage on companies we already know. Try it for yourself. Simply go to joinyellowbrick.com slash chitchat and search a company or ticker you are interested in. You are bound to find a great report on just about any company. That's joinyellowbrick.com slash chitchat. All right. If you're serious about investing, you need to know about public.com. That's where you can invest in everything. Stocks, options, bonds, crypto. You can even earn some of the highest yields in the industry, like the 6% or higher yield you can lock in with a bond account. Public is a FINRA-registered, SIPC-insured platform that takes your investments as seriously

Starting point is 00:28:44 as you do. Fund your account in five minutes or less at public.com slash chitchatstocks and get up to $10,000 when you transfer your old portfolio. That's public.com slash chitchatstocks, paid for by Public Investing. Full disclosures in the podcast description. Yeah, I'd flip it around and ask a listener, if you could invest in a utility in the United states at 10 times earnings with a long runway to grow and an ROIC return on invested capital of 25%? Would you? No, that thing would be trading at 35 times earnings. And let's pull things back a

Starting point is 00:29:21 little bit. What is a great business, Ryan? It is one that can easily raise prices in the face of inflation with no customer pushback, maintain a good return on invested capital while doing it. And it would be nice if they had no competition. This is OMAP. The government has gifted them a monopoly business in the form of the airports, and we have the chance to go along for the ride. Customers have minimal to zero choice when it comes to which airport to fly to, as opposed to which airline they fly, which is hyper-competitive. The government contracts explicitly protect them from inflation. It's a beautiful situation. OMAM has a strong ROIC of above 20%. And if you can take a close look at the chart in the

Starting point is 00:30:06 newsletter, even during 2020, the company had positive return on invested capital. During the worst headwind, perhaps in its whole history, the company generated a positive net income. And if we go back to 2016, excluding the pandemic in 2021, it's been over 20%. We had 20.8%, 22.9%, 25.6%, 27%, then 27.7% in 2023. Now it's down to 24% over the last 12 months because of the supply shortages for the engines, which has muted traffic growth. But once this MDP gets in, I wouldn't be surprised if we go even higher. And the question is, how much incremental capital can be invested into OMAP. I'd say a lot. We will be covering that, I think, for the rest of this episode of why we should be bullish on the Mexican economy and the potential growth of the Mexican

Starting point is 00:31:08 consumer. Okay. Before we do, can you elaborate a bit on the engine slash volume issues and why you think that won't persist and then maybe also address the uh mexico city mismanagement sure yeah so okay let's talk about mexico city mismanagement first um there are multiple reasons to believe you know they can invest more into these airports like i mentioned incremental return on capital excuse me the incremental capital that can be invested into omap and some of the reason you have to kind of like look at mexico city and these engine shortages and then we'll look at the whole economy. So Mexico City's airport is at full capacity. In fact, the government recently knocked its takeoffs per hour from 52 down to 43. I don't know if you've ever flown there. I don't

Starting point is 00:31:59 know if a listener has ever flown there, but I have. It was a mess. I had to debark on the runway, take a bus. I had like two hours for my layover back to the States, and I barely made it. And it was a total mess. And it was way overcrowded. There's no room to expand this. And if you can see in person, yeah, it's just tough. And then the previous government, we have a new administration in Mexico, but the AMLO government canceled a new airport in Mexico City that was going to be built because of environmental reasons. So now the city is stuck, at least for a long time. So there are going to be no new net routes into Mexico City anytime soon. Now, where do we think these new routes are going to go then? I would guess Guadalajara and Monterey, which are the two largest metros besides Mexico City in the country. OMAB operates the Monterey Airport for reference.

Starting point is 00:32:57 And we look at population, Mexico City and the greater Mexico City metro area is about 22 million people, Monterey 5.3, and Guadalajara right around the same. So those two ones, much smaller than Mexico City, but still a ton of potential, I think. And this mismanagement at Mexico City should be Monterey's game. Last quarter, direct flights, and this was shocking to me, direct flights from Tokyo and Seoul, South Korea were added for Aeromexico direct flights from Tokyo to Monterey. I think more airlines will end up skipping the hassle of Mexico City and flying directly to Monterey as instead of, you know, I think historically you probably went to Mexico City and then took a

Starting point is 00:33:44 little puddle jumper up to Monterey. Well, I don't know how long it is, but not too far. And again, if you go directly to Monterey and you have those point to points there, that's going to be more more money for omap and i'll say that again you can fly this isn't a small town this isn't some we'll talk about how monterey is like much nicer than a lot of cities in the mexicos excuse me a lot nicer than cities in the united states this is you can fly directly from tokyo to monterey now and i think another reason you talk about the engine shortages um traffic will benefit over the next few years is the relieving of this headwind from the pratt and woodley Pratt & Whitney engine recalls. These recalls came, I think there was some problem with the

Starting point is 00:34:27 engines. So a lot of planes have been basically tarmacked for a little bit while until they fix them. It's going to alleviate sometime soon. They're kind of working through the issue and fixing them one by one, I think. And these recalls hit some of the discount Mexican airlines hard, which has meant stagnant traffic growth for domestic passengers in 2024. If we look at these charts that are in the newsletter, international passengers have grown steadily since the pandemic. And I would expect them to continue growing. But if we look at domestic passengers, which rely more on those discount Mexican airlines, it's actually declined over the last few quarters on a trailing 12-month basis. And that's because of the engine shortages.

Starting point is 00:35:11 There's just not enough supply of routes right now. And once that gets fixed, we should see a huge boom and we get a revert back to the long-term average. I think when looking at the long term, I would expect international passengers to keep growing. There's a lot of space in Mexico. There's tons of room for tourism just from the United States and other countries around the world. But domestic passengers should be the big bounce back here once supply unlocks. And with the fact that I think that there's going to be a lot more discretionary income that Mexican consumers will have if we have this reshoring thesis and their earnings keep growing at such a quick pace. Yeah, just to reiterate there what Brett said, this is Monterey and Guadalajara are two of the largest cities in Mexico by population.

Starting point is 00:36:07 population. They aren't the largest, but they're two of the largest. And if I'm not mistaken, Monterey in particular is the biggest airport near... Well, Monterey itself is a pretty big production hub, correct? Correct. Biggest manufacturing hub in the country. And the reason is because it's so close to the US-Mexico border. It's the closest one to the Texas Triangle. Just look up where it is on the map. It's pretty ideal for any relations to Texas or the United States in general. So if you're having a manufacturing company there, people that work there would be a ton of automotive plants, John Deere, Whirlpool, Pool Corporation, I think too. Yeah. It's a lot easier to work with that than down in Mexico City.

Starting point is 00:36:52 So once again, we pull up some KPIs here for OMAB, their international traffic and domestic traffic. International traffic has continued to grow despite some of the engine issues. However, we're seeing a little bit of a decline in the domestic traffic. You would maybe think that's a demand issue, that traffic itself is declining. But in this case, Brett, if I'm understanding you correctly, this is mostly a supply issue. There aren't enough jets to really get people where they want to go i guess next question would be why are you so optimistic about monterey i know we just briefly alluded to it but any other context you can provide there yeah so long term a bet on omab is a bet on the continued growth of air traffic in the country

Starting point is 00:37:41 of mexico and specifically monterey it's half the traffic it's going to be the only material airport for the company. This will come from continued tourism from foreigners, but economic growth within the country is much more important. You either have rich foreigners flying into your country or a rising amount of your own citizens flying around your country, or both, hopefully, in Mexico's case. Again, I'll mention international travel should probably keep going. There's no reason, I think, for this capacity, or excuse me, for this, you know, the U.S. tourism down there to stop. I think it's going to keep growing. And given how large the country is, there is a lot of capacity for tourism to grow. There's just a ton of different areas in the country as people

Starting point is 00:38:21 know, Cabo, Puerto Vallarta, Cancun, all these places. My bet, though, is that the rising Mexican middle class will accelerate domestic passenger growth for OMAP over the next five to 10 years, making it much more important to the thesis. If we look at some of the data, the reshoring boom has arrived in mexico in full force and you can give companies like amazon foxconn some of the other i mentioned before and plenty of less famous names planting their flags in mexico to invest in manufacturing and industrial capacity for amazon for instance that is not for the e-commerce business is actually i think it was a five billion dollar investment into a data center or it hub so if you think about that it's going to be a lot of workers earning pretty good wages and we look

Starting point is 00:39:15 at the uh the consolidated data mexican workers are earning much higher wages if we look at this chart from trading economics there's a great website for macroeconomic data since the pandemic we've seen an acceleration in wage growth in mexico and we have about i think over the last 12 months. Yeah, Ryan's sharing the chart here. And it's about 590 Mexican pesos per day, what people are earning, which is about $25 a day. So again, there is still a lot of room to grow here. But that is, just think about it, the more that average wages are growing, or maybe median is a better number, but this is the number I have, I'd assume it's not that far off, the more that this number goes up, there's more people that can afford to fly to Cabo,

Starting point is 00:40:05 to Cancun, to Puerto Vallarta, anywhere from leaving Monterey. And if you look at their GDP per capita, similar thing. It's been soaring over the last few years. And I think Mexico is on the verge of breaking out of this middle income trap and launching its GDP per capita out of this $10,000 ban that's been stuck in in the 21st century. And where is a lot of this manufacturing being centered, Monterey. I like to call it the new Detroit. I would say it's the 21st century Detroit has a population of about 5.3 million people, close to the Texas border, and is the bedrock of the wealthiest Mexican state. More companies are putting their operations in Monterey, and a lot of the companies from Detroit honestly are moving production down there. As I mentioned,

Starting point is 00:40:50 Whirlpool, John Deere. With more manufacturing hubs in there, there's going to be more business travel from inbound flights. More manufacturing means more citizens in Monterey with higher wages instead of getting paid really, really poor wages to work, for example, on a farm or something like that. That's just as a hypothetical scenario. Instead of getting paid $10 a day on that, You can get paid $25 a day doing this. And what will they do with these higher wages? My bet, fly on vacations for tour spots across the country. It costs around $100 to $150 for a round-trip flight.

Starting point is 00:41:30 I did like a quick Google Flights check before this episode. About $100 to $150 for a round-trip flight from Monterey to Cabo, Puerto Vallarta, or Cancun. And as the citizens of Monterey get richer, there will be more demand for these flights. And if there's more demands for these flights, passenger traffic to OMAB is going to increase. And if passenger traffic increases, well, the revenue and earnings are going to keep growing. All right, listeners, we've got a new sponsor here at Chit Chat Stocks, and their name is Blue Chippers Club. Blue Chippers Club was recently started by two friends of ours with the goal of building a tight-knit community of stock-focused investors. Inside this community, everyone gets to share and break down their portfolios, pitch stocks, receive feedback, and participate in weekly calls.

Starting point is 00:42:17 We truly love this idea, and it's why we're promoting it here on the show. In fact, we are in this community ourselves and enjoy just how much value we get by collaborating with other investors. If you're interested in joining, head on over to bluechippersclub.com and hit apply. Right now, it is completely free to join. The link is in the description. All right. I think that's fairly straightforward. We've covered a lot of the business. I think people probably have an understanding of how they make money now and why it's a good business. Just to use an example here to kind of summarize, let's say you were to try to build your own competing airport. First of all, that's quite a capital outlay. Second of all, if you're going to build a commercial airport, you're going to need government approval. And right now, the government has a pretty sweet deal going on with OMAB. My bet, seeing as the prior Mexican administration canceled a really needed airport, it sounds like, for Mexico City, my bet would be it's going to be difficult to build your own and compete with these guys.

Starting point is 00:43:26 So that's why we call it a local monopoly. Let's talk about the numbers, though. Let's go through your OMAB model. I assume it's a 75-year DCF going out to the end of their contract renewal. Yeah, sorry to the Excel junkies. We don't do that here. All I do, and again, we try to just be pretty simple about this. And if it's staring us in the face that the stock looks cheap, then I think it's cheap.

Starting point is 00:43:52 I don't need to be putting in these complicated DCFs for first DCFs. I just think it's a giant waste of time. And given OMAP, it's even simpler than most. It's pretty easy to value. They take all of their excess cash flow and return it to shareholders in dividends. I plan on valuing the stock on almost a dividend discount model type, although I'm not using a discount rate or anything. I'm just going to try to estimate what we can get back over the next five and 10 years owning this stock. And we wanted to be more precise. Yeah, as Ryan mentioned, we could target 2048. Oh, when is the contract and how much dividends we're going to get? I don't know exactly how

Starting point is 00:44:26 the Mexican economy is going to develop. I don't know exactly how air traffic is going to develop. A lot of things can change. So again, the uncertainty is why I want a cheap price here. Today, as we sit here for the Mexico listing, OMAP trades at around $200 a share. And you can look at the data for either the pesos or the US dollars. I think either is fine. And it gets a little bit confusing on the dividends. So I saw different sources with different numbers in their own page is a little bit confusing. So hopefully I didn't get anything wrong here. But from 2016 through actually 2024, that incorrectly, the company returned around $58, excuse me, 58 Mexican pesos per share in dividends, cumulatively the shareholders. And that is with a pandemic in

Starting point is 00:45:17 the middle of things when they didn't pay a dividend. In late 2016, after the first Trump administration decline in Mexican stock prices, you could get OMAP at around $90 a share. So investors who bought that have gotten close to the entire market cap in dividends back since then. Now, what fuels dividend payments? Free cash flow per share. And free cash flow per share has grown at a 15.6% annual clip since 2014. If we look at the last 12 months, It's at $14.90 in Mexican pesos, and it actually was higher in 2023 at $15.40, excuse me, Mexican pesos. So again, that shows that Pratt & Whitney engine thing. Just hearing them, I think there should be a step change up to 2025 once we get this new MDP, inflation adjustments, and then

Starting point is 00:46:10 traffic growth comes back. So there's plenty of room to pay out these dividends. And for the reasons I outlined above, I think honestly, OMAP can grow its free cash flow per share at at least 15% per year for the next five years, if not seeing an acceleration. And that should give them plenty of firepower to grow its dividend payouts to shareholders. Given that management takes most of its cash flow and pays it out as dividends, I think they can probably return at least 75 Mexican pesos per share in dividends over the next five years, if not more. And I think over the next 10 years, we can probably get the entire market cap in cash paid out to shareholders. And after that, the rest of the dividends, they're great. And in five years, I think we could see

Starting point is 00:46:54 them paying out maybe a 20 Mexican peso per share in dividends per year or a 10% yield compared to the current share price. I think free cash flow per share could be something like 25 Mexican pesos, 30 Mexican pesos per share. And again, the stock trades at about 200 pesos right now. Do I think the stock price would be higher then? Yes, I think it would be much higher. So what I'm trying to get at here is that you have a low risk investment here because of the huge dividend payouts that are coming, the monopoly business that's going to be around till at least 2048. But there is still a ton of upside. And I think it'd be quite the compounder for your portfolio as well. So we have low downside, a lot of upside. And that kind of concludes why I'm confident in

Starting point is 00:47:41 betting on OMAP at a full position in my portfolio today. Okay, let's close things out here. What are the risks to this investment? It sounds, you know, we've been very optimistic here. It's a local monopoly that generates a lot of cash, returns that cash to shareholders, and that cash pile is growing. But every investment has its risks. What are you seeing? Well, there's the classic airline risk, right? If air traffic isn't growing, they're going to struggle. And that can happen with huge rises in oil prices. I'm sure that's what happened in 2009 and stuff like that, where if tickets become overly expensive, that's just going to hurt the business because fewer and fewer people are going to be paying for tickets or can't afford them or what have you. So if the

Starting point is 00:48:38 commodity shock or whatever, that can hurt them. It's always going to be there. That risk is going to be there. And it's like, it's almost like saying there's macro risk for Apple or whatever company. Yes, there is. Sure. We all know about it. That's a risk we're all taking investing in stocks. But OMAP, I think it's cheap at the moment because of this Pratt & Whitney engines supply shortage. And I think generally the most important thing hitting the stock, especially when you look at the fact that the peso is depreciated so much. It's the concerns around the new Trump administration's combative approach against Mexico. I'm really not concerned with either, even though the Trump administration is quite loud about stuff about this. It doesn't.

Starting point is 00:49:25 Even if there are tariffs for a small amount of time, it's going to last a few years at most. And the incentives for both Mexico and the US are to work together. So as they can get much richer by using each other's strengths. I think it is very unlikely the US decouples from Mexico. Still, it's possible, but unlikely. And I think it's a much higher risk that China and other places are the ones that are truly going to be decoupling from the United States, given that Mexico has the proximity, the big relationship, it's already the largest trade partner with the United States, stuff like that. And if you look at the idea of bringing manufacturing back to the United States, a 25% tariff is not going to get rid of manufacturing in Monterey. Let's say that

Starting point is 00:50:14 someone in Monterey gets paid, we could even increase it to $50 a day and say that they're at a higher end one. If that, if a company wanted to bring that back to the United States, There are workers at that factory that are probably getting paid $25, $30, $35 an hour. So if there's a 25% increase in cost for operating in Mexico, that doesn't even come close to making up for that wage difference. So I think, again, the trade with Mexico is going to stay high. Monterey will stay. Yeah, Monterey is going to become an increasing hub, get a lot richer, and more people are going to fly. Now, over the long term, is there a risk that Mexican foreign tourism stops?

Starting point is 00:51:01 Sure. Is there a risk that the Mexican consumer stops getting richer for whatever reason? Something bad happens? Yes. But with the price we're paying today, I think that's a perfectly fine risk to take. And I don't think the relationship with the government is a huge issue. Although with any business out there, there is a risk that the government turns authoritarian no matter what country you're in and just says, nope, you can't earn those profits anymore. We're taking it.

Starting point is 00:51:34 That's a risk every business has. Am I wrong in thinking that way, Ryan? Yeah, it's a fair risk. Maybe it's higher at OMAD, but I don't think it's materially higher to keep you away from this company. I agree. And to anyone thinking about the geopolitical risks, the relationship between the US and Mexico, the incentives for the US and Mexico are aligned. Both countries probably want to improve and more deeply integrate their trade relations. It benefits the US.

Starting point is 00:52:14 It benefits Mexico. It decreases our reliance on importing manufacturing or importing goods from the other hemisphere, namely China. So I would not worry too much about it. I know the stock can trade pretty wildly based on Trump's tweets, but – Buying opportunities, right? There was so much – yeah, it is really. I mean there was so much concern about the relationship between Mexico and the US going into Trump's first presidency. Yeah, look at free cash flow per share.

Starting point is 00:52:55 Look at the chart. Look at the international passengers growth. it's really it just it's more noise than news and i would if there are sell-offs because that i would probably treat that like a buying opportunity so that's just kind of my opinion but i think that's pretty much everything anything to close out here brought yeah let's see um there might be some confusion for listeners on where exactly you need to buy this you can buy it either on the u.s exchange or the mexican exchange uh both are highly liquid uh it is the actual name of the company is grupo aeroportario del centro norte there are some other mexican airports out there

Starting point is 00:53:40 uh the southern one and then the pacific one the pacific one i think is also fairly attractive it owns tijuana and guadalajara i think gosh i get it wrong guadalajara puerto vallarta and cabo some different a little more tourist like focus but i think that's correct so yeah that one's attractive as well um buying it shouldn't be too difficult i think sometimes the dividend yield can look off on some of these aggregators because of the just really hard to figure it out sometimes they've had some special dividends but if you want to read their earnings calls and stuff like that it's all in English. Their IR page has a lot of English stuff, I think almost everything in English since they file with the SEC. So no concerns there. People want to research themselves.

Starting point is 00:54:30 And again, if you want to read the research report, we'll have something a little more polished for the newsletter. So you go look at that, look at the charts. I know a lot of people are listening. As we close out, Ryan, have you decided what your stock research report is going to be, which will come out in, I don't have the schedule in front of me, but a couple of weeks? So I will be looking at Adobe, a little-known software company that has been the – An AI loser, as everyone thinks. All the listeners are thinking right now. Is that the buying opportunity you're going to tell us, huh?

Starting point is 00:55:07 It has been sold off primarily due to concerns around the threat from AI, and I'm going to try to dig into those a bit as well as take a look at the business valuation, all that good stuff. So, yes, keep an eye out in your podcast feeds for that. We've got some good interviews coming up as well. As always, I believe the NVIDIA discussion will be coming out a week after this podcast. That is correct. That is correct. Which was a lot of fun actually sitting there and revisiting why the stock has done so well and what it looks like from here because a lot of people just say AI, NVIDIA, great stock. But there's a little more to it.

Starting point is 00:55:47 So that was fun to look at. I think that's going to do it. So I'm going to go ahead and take listeners out here. We want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Stocks is not formal advice or recommendation. We may buy, sell, or hold any of the securities discussed on this podcast. Thank you so much for tuning in, and we will see you next time. you

Chit Chat Stocks - I Bought The Highest Quality Stock In Mexico (And It Trades At 10x Earnings) Ticker: OMAB

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