Hawaiian Electric Industries, Inc. (NYSE:HE) operates an electrical utility and banking business in the state of Hawai'i. HE's businesses include Hawaiian Electric, Maui Electric, Hawai'i Electric Light and American Savings Bank. The electric companies account for 64% of the business portfolio and American Savings Bank accounts for the remaining 36%.
There are numerous articles on Seeking Alpha's website where you can find more information about the company's background and organization - you can find more information here. This discussion will focus solely on the price action and valuation of HE to determine if a disparity exists or not.
Share Price Activity
Since June 2013, HE has been consistently fluctuating between $24 and $27 per share. Below is a chart that shows HE's price movement with a 50-day exponential moving average and a 20-day simple moving average.
I'm not typically one who looks at charts or technicals because I believe that technicals are similar to finding Elvis in a pastry. But what caught my attention about the price action is that when the simple moving average moves higher than the exponential moving average line, you soon see a drop in share price.
I've seen that there are several methods out there used to put a valuation on a stock, and in this case, I would like to go through the numbers using the price-earnings multiple. The calculations and explanations I'm about to use comes from Value Spreadsheet.
First, I looked at the median historical price-earnings multiple for five years from Morningstar.com for HE and found the historical price-earnings multiple of 19.3. Second, looking at Yahoo Finance, the trailing twelve month EPS came in at $1.37. Third, we look at the expected growth rate - which according to Nasdaq.com, HE has an expected growth rate of 7.20% for 2014.
In valuation, it is important to apply Benjamin Graham's margin of safety principle to give any value we put on a stock some room for error. Value Spreadsheet's recommended margin of safety is between 15% to 25%. To be conservative, I'll use 25% to arrive at a growth rate of 5.4% (7.20 multiplied by 0.75).
We can calculate the one year price target for HE by taking EPS (TTM) multiplied by the conservative growth rate plus a whole to the power of five (as years) multiplied by the historical price-earnings multiple. Here are the numbers:
$1.37 x 1.0540 x 19.3 = $27.86
Let's look at what HE is worth today...not one year from now. To arrive at this number, let's consider a 9% discount rate, which is approximately equal to the long-term historical return of the stock market over the last 100 years.
$27.86 / 1.09 = $25.55.
Today, the stock price according to this valuation method is $25.55. This is a rough estimate of the price value, so if you know other formulas to value a stock, you should use them also in forming your own comfort zone in price. But in general, this appears to be the average of HE prices.
Based on HE's closing price of $26.08 on Friday, January 24, 2014, the stock is trading at about 2% over value.
A Buying Opportunity Coming
Looking back at the charts, the moving averages show the simple moving average going higher than the exponential moving average. This indication tells us that soon the stock price should pull back. Therefore, I think a pull back below $26 per share at any price will be a good buying opportunity to purchase more HE, and if you can get the price below $25.55, then by this model, you will have purchased shares of HE at a discount.