Why Hawaiian Electric Industries Stock Is A Solid Recovery Play

by Trefis Team
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Hawaiian Electric Industries (NYSE: HE) – Hawaii’s primary electric utility company – has seen its stock rally by about 20% to levels of around $41 per share since our last update in January discussing the stock’s upside potential. Now, is there room for further gains in the stock? Yes, we think so. The company faced significant headwinds last year, as electricity demand fell on account of lower tourist arrivals into Hawaii through the Covid-19 pandemic. However, with Covid-19 cases now on the decline and highly effective vaccines being rolled out, tourist arrivals in Hawaii are picking up and this should, in turn, drive up commercial and industrial demand for power.

There are also a couple of macro factors that could help the stock.  The company’s banking subsidiary, American Savings Bank, should benefit from rising interest rates over the last few months, while also seeing some upside from the passage of the $1.9 trillion stimulus package. Moreover, investors are likely to continue rotating from higher-growth tech names to real-economy stocks such as utilities. Hawaiian Electric Industries stock’s valuation also looks quite attractive. The stock trades at just about 22x 2021 earnings and revenue growth is also likely to pick up with consensus pointing to almost 14% growth in 2021 and 8% in 2022. The company’s dividend yield is also attractive, standing at around 3.5% based on current prices.

Our analysis comparing Hawaiian Electric Industries Stock performance during the current crisis with that during the 2008 recession provides an overview of the company’s financials and its performance through the 2008 crisis.

[1/19/2021] Why Hawaiian Electric Industries Has 50% Upside

There could be a sizeable upside to Hawaiian Electric Industries (NYSE: HE) stock post the Covid-19 pandemic. Hawaiian Electric provides electricity to about 95% of the population of the state of Hawaii and also runs a banking subsidiary, American Savings Bank. The stock trades at about $34 currently and has declined by about 28% over the last 12 months, as the coronavirus pandemic reduced demand for electricity in Hawaii – which is largely dependent on the inflow of tourists. The stock traded at about $50 per share in February, as the markets peaked pre-Covid, and is roughly 32% below that level presently. The stock also hasn’t seen a very meaningful recovery since March 23, when the broader markets bottomed out. However, with Covid-19 vaccines rolling out and economic activity picking up, the stock could see a sharp recovery as things return to normal and as tourism continues to pick up in Hawaii. Our analysis of the company’s upside potential is based on our detailed analysis comparing Hawaiian Electric Industries Stock performance during the current crisis with that during the 2008 recession.

2020 Coronavirus Crisis

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid a Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 69% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of the S&P 500 index
  • 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

Hawaiian Electric vs S&P 500 Performance Over 2007-08 Financial Crisis

Hawaiian Electric stock declined from levels of around $22 in October 2007 (the pre-crisis peak) to roughly $14 in March 2009 (as the markets bottomed out), implying that the stock lost as much as 37% of its value from its approximate pre-crisis peak. This marked a lower drop than the broader S&P, which fell by about 51%. However, Hawaiian Electric stock recovered strongly post the 2008 crisis to about $21 by the end of 2009 rising by 51% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

Hawaiian Electric Fundamentals In Recent Years Looked Good, But Present Situation Is Challenging

Hawaiian Electric revenues rose from about $2.6 billion in 2017 to about $2.9 billion in 2019, driven partly by higher revenues at the utility business which saw higher fuel costs that were passed on to customers. The company’s EPS rose steadily from around $1.52 per share to about $1.97 per share. However, the picture has changed significantly over 2020, with Revenue over the last 12 months declining to $2.7 billion and EPS also falling to $1.97. This was due to Covid-19, which resulted in a significant reduction in tourism in the state, with hotels, restaurants, bars, and other gathering places being closed or impacted. This in turn drove down demand for commercial and industrial power in the state. The company’s banking business has also been impacted by lower net interest income margins, considering the low-interest-rate environment and higher potential loan-related losses.

Does Hawaiian Electric Have A Sufficient Cash Cushion To Meet Its Obligations?

Yes, we think Hawaiian Electric is well-capitalized and has sufficient liquidity to meet its obligations. The company’s total debt, excluding its banking liabilities, rose to about $2.2 billion as of Q3 2020, up from levels of about $1.4 billion at the end of 2017. Total cash flows from operations grew from around $420 million in 2017 to $512 million in 2019, although they declined to about $484 million over the last 12 months. The company’s cash position is also comfortable standing at about $193 million as of the most recent quarter. The company’s banking subsidiary, American Savings Bank, is also viewed as being relatively low risk, given its focus on community banking and its loan portfolio that is largely secured by residential real estate.


Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Although daily new Covid-19 cases continue to surge in the U.S., touching new highs in early January, there is a reason for optimism. While the Hawaiian tourism space continues to open up with increasing testing, the rollout of highly effective Covid-19 vaccines in the U.S. means that things should start returning to normal in the coming months. In fact, there is likely significant pent-up demand for vacations and this could help tourist arrivals in Hawaii, in turn driving up commercial and industrial demand for power. While it could take a few quarters for demand to return to historical levels, even an indicator of stronger growth should buoy market sentiment around Hawaiian Electric stock. If the stock were to return to levels seen in February 2020, there could be a 50% upside from current levels.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with close to 130% return since 2016, versus about 70% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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