Undervalued Hawaiian Holdings, ROE 32%, FCF/EV Yield 10% – All Investable Stock Screener

Johnny HopkinsStocks Comments

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One of the cheapest stocks in our All Investable Stock Screener is Hawaiian Holdings Inc (NASDAQ:HA).

Hawaiian Holdings Inc. (Hawaiian) is a holding company. The company is engaged in the scheduled air transportation of passengers and cargo amongst the Hawaiian Islands (the Neighbor Island routes), between the Hawaiian Islands and certain cities in the United States (the North America routes), and between the Hawaiian Islands and the South Pacific, Australia, New Zealand and Asia (the International routes), collectively referred to as its Scheduled Operations. It offers non-stop service to Hawai’i from United States gateway cities.

A quick look at Hawaiian’s share price history over the past twelve months shows that the price is up 13%, but here’s why the company is currently undervalued and still has more room from growth.

The following data is from the company’s latest financial statements, dated March 2017.

The company’s latest balance sheet shows that Hawaiian has $740 Million in total cash consisting of cash and cash equivalents of $467 Million and $274 Million in short term investments. Further down the balance sheet we can see that the company has $58 Million in short-term capital leases and long-term debt and lease obligations of $477 Million. Therefore, Hawaiian has a net cash position of $206 Million (cash minus debt).

If we consider that Hawaiian currently has a market cap of $2.526 Billion, when we subtract the net cash totaling $206 Million that equates to an Enterprise Value of $2.320 Billion.

If we move over to the company’s latest income statements we can see that Hawaiian had $494 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 4.69, or 4.69 times operating earnings. That places Hawaiian squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

In addition to Hawaiian’s strong balance sheet it’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Hawaiian generated trailing twelve month operating cash flow of $428 Million and had $202 Million in Capex. That equates to $226 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 10%. Further highlighting that Hawaiian remains currently undervalued.

In terms of its financial strength, the company currently holds approximately 30% of its current market cap in cash. Other financial strength indicators show that Hawaiian remains financially sound with a Piotroski F-Score of 7, an Altman Z-Score of 2.37, and a Beneish M-Score of -2.47.

Regarding its growth prospects, Hawaiian’s current revenue of $2.514 Billion (ttm) is an historical high and its net income of $221 Million (ttm) is just 6% off the 2016 historical high of $235 Million (ttm). To illustrate the company’s recent growth it’s important to remember that Hawaiian had just double digit net profits of $53 Million, $52 Million, and $69 Million in 2012, 2013, and 2014.

What also seems to get overlooked is Hawaiian’s annualized return on equity (ROE) for the most recent quarter. The company had $680 Million in equity for the quarter ending December 2016 and $706 Million for the quarter ending March 2017. If we add those two numbers together ($1.386 Billion) and divide by two we get $693 Million. If we consider that Hawaiian has $221 Million in net income (ttm) that equates to an annualized return on equity (ROE) for the most recent quarter of 32% while at the same time it reduced its long-term debt and capital lease obligations by $20 Million and did not issue any new shares.

Moreover, since 2012 Hawaiian has grown its net income from $53 Million to $221 Million (ttm). At the same time the company has quadrupled its EPS from $1.01 to $4.09 (ttm) and its book value per share from $5.22 to $13.16 (ttm) while improving its gross and operating margins from 48% and 7% respectively to 65% and 15% respectively for the trailing twelve months.

As for Hawaiian’s current valuation, the company is currently trading on a P/E of 11.5 compared to its 5Y average of 15.4*, a P/S of 1, a FCF/EV Yield of 10%, and an Acquirer’s Multiple of 4.69, or 4.69 times operating earnings. All of which indicates that Hawaiian sits squarely in undervalued territory.

*Source: Morningstar

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