Being a Hawai'i local, I like to regularly check up on stocks that are either based in Hawai'i or have strong ties to Hawai'i. I've provided regular coverage on Matson, Inc. (NYSE:MATX) and Hawaiian Electric Industries, Inc. (NYSE:HE).
Recently my attention has been caught by the progress and growth in the airline industry. While most commentators and analysis focus on the big names like American Airlines (NASDAQ:AAL) or Delta Airlines (NYSE:DAL), to name a couple, one name that has gained a lot of momentum recently has been Hawaiian Holdings, Inc. (NASDAQ:HA), the owner of Hawaiian Airlines, Inc. Recently writers here on Seeking Alpha and other investment forums have given attention to Hawaiian Holdings, Inc. because of their great rise in share prices, and so am I.
Hawaiian Holdings, Inc. typically would never fall under my radar only because my investment philosophy is that everything I own must pay a dividend - with the exception of my silver. However, this name raised my eyebrows because I travel with Hawaiian Airlines about 95% of the time I travel, and that the water cooler chatter between my friends is that it's a decent investment. I wanted to really see if it is a good investment in terms of valuation. That being said, I'd like to go over the valuation using the price-earnings multiple method that was presented by Value Spreadsheet.
First, I looked at the average historical price-earnings multiple for five years from Morningstar. Unfortunately, the P/E for 2011 was not provided, therefore I only averaged using four values: 2009 (3.1), 2010 (3.7), 2012 (6.5), and 2013 (16.3). Therefore the historical P/E multiple came out to 7.4. Second, looking at Yahoo! Finance, the trailing twelve month EPS came in at 0.98. Third, we look at the expected growth rate, which according to Nasdaq.com is 23.58%.
In valuing stocks, it is important to remember to apply the margin of safety principle that was introduced by Benjamin Graham to account for some potential for error. Value Spreadsheet's recommended margin of safety is between 15% to 25%. I err on the side of caution and therefore use 25%. Using the 25%, we arrive at a growth rate of 17.69% (23.58 multiplies by 0.75).
Bring Out The Calculators...
We can calculate the one year price target by taking the EPS (TTM) multiplied by the calculated growth rate plus the whole to the power of five (as year) multiplied by the historical P/E multiple. Here are the numbers:
$0.98 x 1.1768^5 x 7.4 = $16.37.
Let's look at what the stock is worth today... not later down the road. To arrive at today's price valuation, let's consider a 9% discount rate, which an approximation relative to the long-term historical return of the stock market as a whole over the last 100 years.
$16.37 / 1.09 = $15.02.
Today, the stock price according to this valuation method is $15.02. Keep in mind that no one valuation method is entirely on spot, and that each method gives you a rough estimate of the value. Therefore, if you know of other valuation methods that you prefer to use, I encourage you to use the methods you're comfortable with.
Based on Hawaiian Holdings, Inc.'s closing price of $9.85 on Thursday, February 6, 2014, the stock is trading at about a 35% discount.
Other Influencing Factors
I look at a variety of information sources before deciding what I'll buy into. This obviously helps me a bit. I also look at the chart price using a 20-day simple moving average- or SMA, and a 50-day exponential moving average, or EMA.
The theory behind this is that for long positions, the SMA line must be above the EMA line, and both averages must be sloping upwards. Looking at the two, both criteria are met. Although I do caution that I prefer not to use technical analyses because I believe that those who do technical analyses are those that like to look for Elvis' face in a potato chip.
Another factor I look at are the analysts' opinions. Yahoo! Finance shows that Hawaiian Holdings, Inc. has one-up on the recommendation trends.
Overall, I believe that Hawaiian Holdings, Inc. is a reasonably safe bet at this point due to the low price valuation and the technical indicator I mentioned above.