Free Stock Research Report: Hawaiian Holdings, Inc. (HA)

Investing is extremely difficult if you are focusing on large-cap companies and their short-term performance. Even the smartest investors can’t produce any meaningful alpha by following this approach. On the other hand, investing is easy if you are focusing on small-cap companies and their long-term performance. In this article we will share an idea that is likely to beat the market by a large margin. We will revisit this idea in 6 months and publish a follow-up article. Eiad Asbahi of Prescience Investment Group initially pointed out this opportunity but he probably got his clue from activist investor Zac Hirzel.

Hawaiian Holdings, Inc. (NASDAQ:HA)

Zac Hirzel of Hirzel Capital Management has been acquiring a stake in Hawaiian Holdings, Inc. (NASDAQ:HA) since the beginning of 2013 and is now its largest shareholder with a 10.8% stake. In addition, he was recently appointed to be a member of the company’s board of directors. Other hedge fund managers recently buying the shares include Brad Gerstner of Altimeter Capital Management and Geoffrey Raynor of Q Investments. Gratia Capital, Nokomis Capital, and Castlerock Asset Management are among HA shareholders too. We pay attention to hedge fund activity in small cap stocks because our research has shown that the most popular small-cap stocks among hedge funds historically outperformed the market by an average of 18 percentage points per year (read the details here). It’s not a typo; 18 percentage points is a large margin and Hawaiian Holdings, Inc. (NASDAQ:HA) is one of those stocks that fit the bill.

Hawaiian Holdings, Inc. (NASDAQ:HA) is a $600 million market cap holding company for Hawaiian Airlines, the 11th largest domestic airline that has consistently ranked highest for on-time departures and arrivals in the U.S., based on the Department of Transportation. It operates non-stop flights between Hawaii and 11 major cities in the U.S. mainland, Japan, South Korea, Taiwan, Australia, New Zealand, American Samoa and Tahiti. New non-stop service between Honolulu and Beijing is expected to begin in April 2014.

Since 2010, Hawaiian Holdings, Inc. (NASDAQ:HA) has been investing heavily in its business to grow its international routes in Asia, which has hurt profitability and cash flow. However, it is now at an inflection point in terms of growth, as its fleet size stabilizes at 50 aircraft through 2015 (vs. 47 in 2013 and 37 in 2011). Consequently, management expects capital expenditures to decline through 2016 from a peak of $525M in 2013, which should result in improving free cash flow generation that turns positive in 2015 and 2016 (vs. negative cash flows of $305M in 2013). Combined with maturing routes that will require less investment (and, hence, generate more cash flow) and reduced hedging costs for jet fuel from new risk management programs, it should not be a stretch for Hawaiian Holdings, Inc. (NASDAQ:HA) to improve its profitability going forward. Some investors believe that, starting in 2016, the airline could begin to return some cash to shareholders. Given the heavy investment the company made in recent years, even the possibility of such an event would have a huge positive impact on investor sentiment, in our view.

There has been renewed interest in airline stocks following the recent consolidation wave, with the big three – American Airlines Group Inc (OTCMKTS:AAMRQ), Delta Air Lines, Inc. (NYSE:DAL) and United Continental Holdings Inc (NYSE:UAL) – receiving the most investor attention, at the expense of smaller carriers like HA. The stock trades at discount to peers on both a forward P/E (9.7X vs. 12.5X for peers) and EV/EBITDA (3.8X vs. 4.8X for peers) basis, reflecting HA’s current below-average profitability metrics. However, as growth moderates and the carrier harvests its previous investments, we believe margins, returns and cash flows should all rise from a cyclically low base, leading to multiples expanding toward levels in-line with the industry. Simply applying peer multiples to current estimates yields a stock price between $14.50 and $15.50, or 28-37% upside from today’s price.

At this point, it is unclear what actions Zac Hirzel will take as a new board member. However, as the largest owner of the stock, the activist hedge fund manager’s interests are clearly aligned with other investors so his appointment should be viewed as very shareholder-friendly.

Recommended Reading:

Stonerise Capital Management Trims Its Stake in Cash Store Financial Services Inc (CSFS)

Crosslink Capital Cuts Stake in Pandora Media Inc (P); ESL Investments Sells Some More AutoNation, Inc. (AN) Shares

Corvex Capital Ups Its Stake in Williams Companies, Inc. (WMB); Soroban’s Eric Mandelblatt To Join Company’s Board

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!