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Hawaiian Holdings: Beware Of The Exuberance

Summary

Hawaiian Holdings' stock has outperformed over the past five years.

The company is not diversified in its revenues, revenue growth is slowing, and international market conditions will hinder market growth abroad.

Rising costs will prevail and diminish HA's operating margins throughout 2016 and 2017.

Overall, we believe Hawaiian Holdings represents an opportune short for 2016 given its current market valuation.

With the bull market already turning seven years old, the search for a yield is becoming more and more competitive in the U.S. stock market. As with 2015, oil prices and interest rate speculation will dominate the investing landscape of 2016, and many analysts are advising that now is the time to gain exposure to the U.S. oil industry due to the speculation of prices finally bottoming out. Operating under the assumption that oil prices are finally hitting a bottom, what does this mean for companies that have reaped the benefits of lower oil prices for the past year? One of the industries that has benefited from lower oil prices is the U.S. airline industry. Recently, many top U.S. airliners have posted record profits due to lower operating costs, which are being driven down by lower fuel expenditures. Presented below is a five-year weekly chart of the NSYE ARCA Airline Index:

Source: StreetSmart Edge

The industry's performance is mostly due to U.S. airliners' abilities to restructure their business, cut costs, and increase profit margins since the U.S. government intervened earlier in the decade. According to the International Air Transport Association (IATA):

"North American carriers are leading the industry's performance and are expected to generate considerably more than half the (worldwide) industry's total profits in both 2015 ($19.4 billion) and 2016 ($19.2 billion). On a per passenger basis, profits of $21.44 in 2016 also place their performance at the top of the industry."

The U.S. airline industry, which includes both major and regional airliners, now has a P/E of 9.20 and an average P/E weighted by market cap of 8.54. Presented below are the calculations for the airlines industry average P/E and charts for the industry P/E distribution. Note the date of data collection:

No.

Company Name

Market Cap (thousands)

Industry Percentage

P/E

Weighted Average P/E

1

Allegiant Travel Company (NASDAQ:ALGT)

$2,800,000.00

2%

12.86

0.303941644

2

Alaska Air Group, Inc. (NYSE:ALK)

$9,640,000.00

8%

11.77

0.957733558

3

Hawaiian Holdings, Inc. (NASDAQ:HA)

$2,400,000.00

2%

15.01

0.304076699

4

JetBlue Airways Corporation (NASDAQ:JBLU)

$6,450,000.00

5%

10.2

0.555329948

9

American Airlines Group (NASDAQ:AAL)

$25,120,000.00

21%

5.93

1.257377072

10

Delta Air Lines, Inc. (NYSE:DAL)

$36,390,000.00

31%

8.29

2.546406853

11

Spirit Airlines (NASDAQ:SAVE)

$3,370,000.00

3%

10.75

0.305794432

Total

$137,040,110.00

100%

9.2075

8.542782229

Source: Yahoo Finance (Data as of 3/09/2016)

Source: Yahoo Finance (Data as of 3/08/2016)

From the chart, it is evident that larger airlines like American Airlines and Delta have lower valuations as opposed to regional and budget airlines, which market themselves as either a more affordable or quality experience, respectively. Examples of these airlines are Spirit Airways, JetBlue Airways, and Hawaiian Airlines. Of these mentioned airlines, Hawaiian Holdings, the parent company of Hawaiian Airlines, has performed exceptionally well over the past five years.

Hawaiian Holdings is making a roaring comeback following its 2003-2005 bankruptcy restructuring. Since 2011, the company's profits have risen from a ($2.6 million) loss in 2011 to $182.6 million in 2015. In addition, the company has increased revenues from $1.650 billion to $2.317 billion. Presented below is Hawaiian Holdings' revenues vs. net income. Note the estimates for 2016 and 2017.

Profit expansion in recent quarters has been driven by strong demand, lower oil prices, and consistent increases in operating efficiency. During 2015, Hawaiian experienced an 8.6% decrease in operating expenses from the prior year. This decrease was driven by a 38.4% decrease in aircraft fuel expense. In addition, the company increased its North American and neighbor island flight yields by 5.1% and 6%, respectively. New flight route initiations, such as Hawaii to Oakland, CA, Maui to Los Angeles and San Francisco, helped drive both increases in revenue and passenger revenue per revenue passenger mile, otherwise known as flight yield. Further expansions in Q1 2016 are expected to increase available seat miles (ASM) between 2.5% and 4.5%, according to Hawaiian's management. The success of its turnaround and current success are echoed in its stock. Between 2011 and 2016, Hawaiian's stock returned over 550%, and in 2015, management announced a $100 million, two-year buyback. As of December 31, 2015, the company has $59.8 million remaining to spend under the stock repurchase program. Displayed below is a five-year weekly chart of Hawaiian Holdings' stock:

Despite the company's rapid growth, revenue growth is forecasted to grow at only 3.7% and 5.2% for 2016 and 2017, respectively. Displayed below is Hawaiian's revenue growth rate since 2008:

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

FY 2014

FY 2015

FY 2016 Est

FY 2017 Est

23.2%

-2.3%

10.7%

26.0%

18.9%

9.9%

7.4%

0.1%

3.7%

5.2%

Source: Bloomberg Terminal

Evident in the table is that Hawaiian's future growth might not be as robust as past quarters - which may mean the company is finally...


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