- By Robert Abbott
On February 17, 2020, Hawaiian Electric Industries Inc. (NYSE:HE), hit a high of nearly $50. Then, like most of the market, the share price collapsed as the Covid-19 pandemic hit. Unlike many companies in other industries, its share price did not recover:
Should we be concerned about Hawaiian Electric or is this a good time to buy?
What is Hawaiian Electric?
Based in Honolulu, this holding company has three segments:
Electrical Utilities: Three subsidiaries that provide electrical service to 95% of Hawaii's population, through five separate power grids on the islands of Oahu, Hawaii, Maui, Lanai and Molokai. These utilities provided 89% of the parent company's revenue and net income in 2019.
Banking: Since 1988, the company has owned American Savings Bank, F.S.B, the third-largest largest financial institution in Hawaii ($7.2 billion in assets at the end calendar 2019).
Other: In 2017, Hawaii Electric created Pacific Current, LLC to invest in renewable and sustainable infrastructure investments. This segment also takes in general and administrative expenses at the corporate level.
According to the 10-K for 2019, the company had 465,466 electric accounts that generated $2.517 billion in revenue. To supply power, it generated 4.973 million Kilowatt-hours and purchased 4.169 million kWh.
Approximately two-thirds of its generated power came from fossil-fuels, 64%, down from 66% in 2018. Efforts continue to reduce that measure.
Its utilities are regulated by the state of Hawaii, including rates, and they have a near-monopoly.
The 10-K noted, "The state has granted Hawaiian Electric, Hawaii Electric Light and Maui Electric nonexclusive franchises, which authorize the Utilities to construct, operate and maintain facilities over and under public streets and sidewalks." The franchises are in effect for indefinite periods.
The utilities experience competition from, "IPPs; customer self-generation, with or without cogeneration; customer energy storage; and the potential formation of community-based, cooperative ownership or municipality structures for electrical service on all islands it serves."
Its banking segment faces tougher competition for customer deposits and loans. It reports competition from 'two larger institutions', as well as smaller Hawaiian banks and entities such as credit unions, mutual funds, mortgage brokers, finance companies and investment banking firms.
Why the share price remains low
For electrical utilities and banks, there is no mystery about low share prices. Since the pandemic took hold and numerous restrictions were put in place, there's been diminished demand for energy and capital.
Looking at the third-quarter and nine-month returns, we see revenue is down in both of its key segments:
Utility revenue for nine months: Down from $1.90 million in the same period of 2019 to $1.69 million in 2020.
Bank revenue for nine months: Down from $247,287 to $233,096.
A part of those shortfalls dropped down to the bottom line:
Net income for nine months: Down from $151,619 to $147,339.
Diluted earnings per common share, for nine months: Down from $1.39 to $1.35.
The company did get its costs down as well; banking and utility revenue were down about $200,000 while net income was down about $4,300.
In part, debt is behind the mediocre financial strength rating, and debt goes hand-in-hand with utilities. They commonly invest large amounts in physical infrastructure and then collect a return on the assets for decades to follow. It is something utilities must endure, but it also helps keep competition away.
As the table shows, Hawaiian Electric's cash-to-debt ratio is better than those of its peers in the Utilities-Regulated industry and its own 1-year history. Its interest coverage is roughly on par with its peers.
The Piotroski F-Score tells us the company passed 7 out of 9 criteria for good companies, while the Altman Z-Score would be worrying if not for the fact it is a regulated utility and regulators would provide adequate rates if the utility got into financial hot water.
Return on invested capital is slightly lower than the weighted average cost of capital, but that should change positively when the economy of Hawaii regains some of its momentum. Assuming vaccination rates are high enough and the Covid variants can be kept in check, the economy might rebound this year.
The first set of figures, reflecting the profit margins and return on equity and assets, paint a picture of a company that's about average in the industry. Not trailing, and not leading, just about average. All are positive of course, which is the essential thing.
When we get down to the growth lines, we see positive growth of revenue, but negative growth for profitability, Ebitda and earnings per share. Let's look at 10-year charts for each of them, starting with revenue:
Over the past decade, Ebitda has grown fairly steadily, but the pullback in 2017, pulls the 3-year average down as shown on the table:
The path has been much the same for earnings per share without non-recurring items:
Despite what you see on the table above, revenue, Ebitda and earnings per share have all grown steadily over most of the decade. The figures we see on the Ebitda and earnings per share lines have been affected by two aberrant years.
Dividend and share buybacks
As one might expect of a well-established utility, Hawaiian Electric offers a respectable dividend. Investors counting on that divided might be disappointed by its slow rate of growth (1.1%) over the past three years. A closer look shows the dividend payment was flat at $0.31 for more than 20 years. Then, it went up by a penny a year for the past three years.
Unfortunately, dividends have been eroded by an average of 1.9% per year by the issuance of new shares:
Then there's the matter of the dividend yield declining as the share price has risen, as it has fairly consistently for most of the past decade:
So, what does all that add up to? In its 10-K for 2019 Hawaiian Electric provided this chart for its total returns that year and the preceding ten years:
GuruFocus provides more recent information, and a comparison with two other electrical utilities, Portland General Electric Company (NYSE:POR) and Idacorp Inc (NYSE:IDA):
Both Portland General and Idacorp have price charts that look very much like Hawaiian Electric's: Reasonably steady growth until the first quarter of 2020, then a plunge when Covid-19 restrictions went into place and the economy slowed, and not much of a recovery since bottoming out.
First, the GuruFocus Value Chart:
The price-to-earnings (P/E) ratio of 17.71 is slightly above the regulated utilities industry median of 16.48 and below its own 10-year median of 19.82. The PEG ratio (P/E divided by the 5-year Ebitda growth rate) of 7.08 is significantly higher than the industry's 10-year median of 2.66, but close to its own 10-year median of 7.06.
Its price-to-book (P/B) ratio is slightly higher than the industry's 10-year median of 1.47. And, its price-to-tangible-book is also down when compared with its 10-year median:
With only 1 (out of 5) star predictability, a discounted cash flow (DCF) analysis would be unreliable.
Considering these metrics, we might assume its value is somewhere between fair and modestly undervalued.
What do the gurus think?
They were buying Hawaiian Electric stock when the price was declining in the first three quarters of 2020:
At the end of the fourth quarter of 2020, five gurus held the company's stock. The three with the largest positions were:
Jim Simons (Trades, Portfolio) of Renaissance Technologies, with 179,600 shares after reducing his holding by 51.56% during the quarter. What was left represented 0.16% of Hawaiian Electric shares and 0.01% of Renaissance's total assets under management.
Mario Gabelli (Trades, Portfolio) of GAMCO Investors reduced his stake by 2.47% during the quarter, to finish with 54,200 shares.
Should we be concerned about Hawaiian Electric's share price and the diminished demand it has experienced for several quarters? I think not. Instead, this appears to be a time to consider buying if you're looking for a conservative, well-managed utility.
As demand for electrical power goes up again (assuming it does), investors are well-placed to benefit. The dividend, important to many utility investors, may have been eroded by share dilution and previously rising share prices, but is safe and may rise again. Overall, this is a stock that might interest investors who previously held bonds.
As the analysis suggests, Hawaiian Electric stock may interest income investors who want to see steady dividends or total returns. It may also interest value investors who are able to find a margin of safety in the metrics. But it appears there is little here to interest growth investors.
Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.
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This article first appeared on GuruFocus.