Grupo Aeromexico

Though Grupo Aeromexico SAB de CV appears cheap due to heavy downward pressure in the past year, we have capped its rating at 3 stars to factor in the possibility that it represents a value trap. The stock currently trades at a 25% discount to our quantitative fair value estimate of $20.64 per share; however, caution is warranted due to this estimate's high uncertainty rating.

The firm's balance sheet bolsters our valuation estimate. Leverage can enable a company to invest in growth, potentially boosting shareholder value more than equity financing alone. Reflecting the firm's leverage is its EBITDA/interest coverage ratio of 3.5, which falls in the bottom 30% compared with peers globally. Although the firm's ability to cover interest payments with EBITDA is limited, shares could sharply rebound if economic circumstances change or recent investments reduce fears of default. We believe this is a sign that shares could be cheap.

The firm's profitability is an additional encouraging factor. Highly profitable companies are often more resilient in recessions and are likely to generate stronger future cash flows for shareholders. The firm's earnings yield of 76.3%, for example, ranks in the top 10% compared with peers globally. This suggests that it is generating substantial earnings relative to its share price, which further promotes our favorable price/fair value ratio.

The company's narrow quantitative moat rating indicates it could outearn its cost of capital and maintain robust margins for 10 years or longer.