When Bank of Hawaii Falls Below 52-Week Low, It's Time to Buy

Today's research recommendation is Bank of Hawaii (BOH). BOH is described by MergentOnline as:

The bank holding company for Bank of Hawaii (the Bank). The Bank provides financial services and products mainly in Hawaii and the Pacific Islands.

MergentOnline also points out that BOH has increased its dividend every year for 30 consecutive years.

BOH is within 3.96% of the one year low and yields 4.80%. According to Value Line Investment Survey, BOH typically trades around 14 times earnings. At a 9.77 P/E ratio, either of two things need to occur:

1. BOH earnings will have to come down
2. BOH will have to revert back to selling at 14 time earnings

On January 5th, the investment bank Keefe, Bruyette and Woods (KBW) downgraded BOH because of expectations of lower earnings. KBW says that 2009 and 2010 earnings will be $2.60 for each year. This puts BOH's stock price at $36.40 if it were to trade at around 14 times earnings. Conversely, BOH would trade at $56.84 if it were to revert to the mean based on 2008 earnings of $4.06 (The Bank of Hawaii has estimated fourth quarter 2008 earnings of $0.89).

From the perspective of Dow's theory, BOH has three downside targets from the prior peak of $70 in September of 2008:

• $50.35
• $30.70
• $11.05

In the years from 1990 to 1997, BOH has retraced from the peak to between the 2nd and 3rd retracement levels according to Dow's theory. If applied to the current price action, this would bring BOH down to the level of $20.87. This would be the ideal buying point, however we must be ready to pull the trigger anywhere between $30.70 and $20.87.

Considering that we're in a bear market it becomes necessary to decide how much an individual wants exposure to a bank in a deflationary environment. Assuming the worst, BOH could be viewed from the perspective of the "long-term" prospects based on the dividend. At the current dividend yield of 4.80%, BOH would double in approximately 15 years. This means that if you're of the buy-and-hold mindset then you would need to retain this stock for 15 years to recoup all that you have initially invested if you reinvest the dividends. This is a more accurate measure of the "long-term" in case you're wrong about the direction of the stock price. Additionally, BOH exhibits a 7 to 10-year cycle for price movement from trough to peak.

In the accompanying chart we can see that there have been two other major bottoms in the BOH's stock price that were accompanied by a surge in trading volume. The current volume is giving similar indications as the 1990 and 2000 lows. All we need now is a good collapse in the price to reassure us of the opportunity to buy. That opportunity might come in the wake of BOH falling below the 52-week low of $36.32 reached on November 21, 2008.

BOH's management has consistently rewarded shareholders for their patience and is likely to continue to do so. There are many ways to examine this company, however, be sure that you're comfortable with investing in a bear market environment similar to 2008 before deciding to make your next purchase. Good luck in your research of this company.

Disclosure: None

Comments

[SALTAWAY:]

In the Fall of 2008, BOH went up 15 points in 1 or 2 days from $55 to $70. I think it would make more sense to use $55 as the peak.

Jan 13 09:14 AM

[District Ba...:]

You can spew all the nonsense you wish about what charts did this time and that time, but I prefer to study the fundamentals of the company. With this name, it's not too difficult...

As its name indicates, Bank of Hawaii conducts the majority of its business in Hawaii (they do also have some home equity products available in the continental US, as well as some amount of presence in places like Guam, where US military is established). So since substantially all of its business is in Hawaii, let's look at the Hawaiian economy. A massive driver of that economic engine is none other than tourism. I don't know very many people packing up their spouse/kids/parents and heading off to Hawaii, these days.

The reduction in tourism will likely be enough to create some problems in some of their lodging CRE credits. I don't expect to see horrific problems, but when you're trading at a lofty (for banks) valuation of 240% TBV, you give up the luxury of showing credit problems. If you do show them, you lose your "safe haven" label, and investors will generally sell your stock down to a more reasonable (sub 200%) multiple of TBV.

Jan 13 10:25 AM

[MichaelSchm...:]

The fundamentals on this stock don't justify its high valuation (it is trading at 2.5X reported book value, which is about twice where most banks are trading). This implies a credit quality I think undeserving in this environment. BOH has about $10B in total assets. $2.6B of that are in investment securities, of which ~$300 million are in non-agency MBS. The non-agency MBS have been written down by less than 10% from cost, so I expect further writedowns here. BOH has about $4B in consumer loans, the majority of such ($2.6B) is in residential mortgages secured by property in Hawaii. A significant portion of Hawaiian homes and condos are second-homes owned by non-residents from the US and Asia. These loans default at a higher rate than those secured by owner-occupied homes. C&I, commercial mortgage and construction make up an additional $2B, and we are just seeing the tip of the iceberg in defaults in those books.

In the end, Hawaii's economy reflects what is happening in the US and Asia, and the signals from both of those markets point strongly down. Those counting on Hawaii's economy being immune from this are akin to those who believed ______________ (fill in market where people in the past have claimed immunity, e.g., Manhattan's real estate market) was immune. It is coming to Hawaii, too, and when it does this stock will be flirting with the lowest of the three Dow downside targets cited by the author.

Long puts.

Jan 14 11:41 AM

[Dividend Inc:]

Greetings All,

Your points are well taken which explains the reason why I expect BOH to be worth looking into at around $20 or lower. The title itself is unrelated to the title that I submit to SeekingAlpha (see www.dividendinc.blogsp....)

Again, I only see this as a perfect time to do your homework and come to your own conclusions about the numbers. Since the facts, as mentioned by "District Banker" and "MichaelSchmichael," are widely available I would be wasting my time to point out the obvious.

As my blog points out "...Only postings with 'Research Rec.:' before the stock name are those that are considered by Dividend Inc. as worthy of being researched then put on a watchlist and bought at the lowest possible price after the Research recommendation."

I debated actually using the $70 high for the purpose applying Dow's theory. However, the use of the $70 high reflects the emotion of the markets and is therefore a relevant part of determining sentiment.

Yeah, I know, I'm idealistic and unrealistic at the same time however I have no illusions about BOH being a buy at this time as indicated by the SeekingAlpha staff who continually put a spin in the titles that I submit which are often juxtapose to the ones on my blog.

However, thank for taking the time to critically contribute to the information that is out there. I certainly respect and appreciate your input.

-Touc

Jan 14 01:05 PM

[managematics:]

Yes, as suggested consider the local economy. Hawaii relies heavily on tourism but the state did not see a huge credit-fueled housing boom over the past several years. That lack of a bubble explains why the state has one of the lowest default rates in the country. Combine that with conservative underwriting and it explains why one might think this name is taking an unfair whack with its sector.

A few quarters of earnings will tell the story. I'll be buying dips in this name.

Jan 20 09:14 AM

[legmaker:]

Hello everyone,
Just so everyone know's I bought in the money puts Friday and I will tell you why. Although I love this name long term and also believe $20 is a great place to buy this stock, I am unsure if a PE valuation is a good way to trade or invest in this name. Since financials are more of a trading prospect right now, I could either win big or lose big on Monday. Here are the reasons I bought puts and my comments will mimic many of those who wrote comments on this stock.
1. 16% of this state's economy is tourism. Since a trip to Hawaii is much more expensive than that of Mexico, even those with a little extra cash are probably going some place much less expensive.
2. 18% of their economy is real estate. When checking the numbers this state has held much better than others with respect to price, but prices are still down 3.6% to date. Since many people were using their homes as ATMs they will still see quite a bit of of problems in their market.
3. The most important is the forecast of unemployment which is still good, has it increasing 1.3% year over year, to 3.9%.
4. visitor arrivals down 10.6% yoy.
5. reall personal income down .3%
6. CPI up 4.6%.

With their total securities portfolio at $2.9 billion, 40% is with the Federal National Mortgage Assoc. and 29% with the Federal Home Loan Mortgage corp. As of 9-30-08 they had a total of $6.539 billion in home loans and leases with a loss provision of $115 million.
This company looks much better than many financials, including regionals, but may be a bit pricey. I didn't buy puts because I thought BOH was going to have a horrible quarter, I just think the stock is priced for perfection, and unless they beat by quite a bit will trend down after earnings. Have a great day and God Bless.

Jan 24 04:02 PM