Airline Amore

Originally written and published by Andrew Brierty on Wall Street For Teens. Co-authored & Edited by Christopher Nash.



We will offer investment advice in this article as we believe the opportunity to be sound backed by accurate market data.

The airline sector has been all over the place throughout the year; some returning significant gains while others struggle to meet expectations.

However a few airlines have posted gains beyond forecasts and still have room to grow. Southwest Airlines (LUV) up 14.5% YTD, Alaskan Airlines (ALK) up 47%, Jet Blue (JBLU) up 66%, and the big winner, Hawaiian Airlines (HA) which is up an astonishing 70% for 2015. Hawaiian is the most attractive of all these not just for its terrific past year but for the future it holds going into 2016.

Strong Fundamentals:

But first, what sets Hawaiian apart from the others and puts them so far ahead ? The answer is simple business fundamentals. Hawaiian has been able to maintain steady revenue growth for the past 5 years in a row, which has not been affected by any of the crashes or depressions; the reasons analysts downgraded the stock to almost junk in 2009. This is a very strong sign to see.

Another good indicator is a firm’s MOAT. A MOAT is an advantage that one firm can have against its competitors in the same field or same operation. Hawaiian’s MOAT in this case is its high popularity and large brand name in Hawaii as the single largest operator of the region to mainland USA and other international destinations.

Think of a MOAT as Coca-Cola and house brand Cola. No matter how cheap the store brand becomes, the Coca-Cola brand will always outsell the latter due to its reputation, brand recognition, and long history as one of the most popular beverages of present times. The same principal applies to Hawaiian Airlines.

Another lead is its operating margin. Hawaiian manages to maintain low operating costs (with significant help from falling oil prices, which have just hit a new low.  Oil prices have recently dropped below $40 a barrel) that gross profits can soar beyond any other airlines. And Hawaiian Airlines is one of the few airlines that does not abide by a contracted oil price; this means that as long as oil continues to drop, so will airline operating costs. Folks, this is a positive thing.


Above: crude oil prices through Q4 2015.

In fact, Hawaiian’s operating margin is 85% better than its peers. This can also be attributed to their fleet of mostly smaller-mid size aircraft. These factors have lead to a growing ROIC (return on invested capital) of over 15% for 3 years consecutively.

Future Growth: 

With such a high growth rate and steady business, many investors are surprised to see no dividend yield and no news for dividends to arrive in the future.However, perhaps this is a positive thing.

A dividend is simply put extra profit left over that the company divides upon its shareholders.  While investors love dividends and steady income, a zero  dividend approach as such can be a sign of a good future. With all the extra profits and cash on hand, we like to see companies that use their excess cash to build upon operations and/or other investment strategy to improve the company in the years to come.

This is evident with Hawaiian Airlines. Recently, they have partnered with an Italian Leather Company with hopes to completely redesign their seats in premium cabins for a much more comfortable customer experience. It should also help improve customer loyalty, and expand client base with upgraded premium cabins.

The carrier is also expanding its global routes; opening a new non-stop flight from Hawaii to Japan beginning in 2016. The previously mentioned business moves, along with Hawaiian adding other new features set to arrive in 2016 are an efficient way of spending the extra cash on their balance sheets.

The Hedge Fund View: 

Large Hedge fund managers are fond of the stock too. Managers called for a short of the stock around the $41 mark for early to mid January. Shorting a stock means selling the stock at a high with the belief that the price will soon fall.  NEVER SHORT IF YOU DO NOT THINK THE STOCK WILL REBOUND. 

Those same investors will then buy back the stock at a lower price. Their profits are defined by the difference in price over this period of selling and buying. With volume easily traded at high levels in this position, it is no problem for the hedge funds to buy big and dump their positions in a days notice. It is with these high volume sell offs that we can get bargains occasionally, just like yesterday’s close when the stock fell back down to $37.30.

You do the math: by selling at $41 a share, and buying back at $37.30, investors made a profit of $3.70 a share, which is not to shabby if I say myself.

My Thoughts on Investing in Hawaiian:

Hawaiian Air shows promise and we can expect to see an impressive 4th quarter end going into December which by history never fails to show some nice gains.  Following  Q4, we should see a slight slow down in growth rate, so I would advise buy in on a pull back to low $37s or high $36s just to be more cautious. For a quick sell, short or buy. But continue to hold this stock as I believe it will continue to fly high for years to come. Analysts expect the EPS to be around 5 percent in 2016.



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