At what point should a publicly traded airline consider buying back its stock and becoming privately held?
This was the unexpected – but very interesting – discussion that emerged during the Hawaiian Airlines third-quarter earnings call. During the Q&A session, Hunter Keay of Wolfe Trahan made the point that despite its strong financial performance, the carrier’s stock is stubbornly resistant to increase. He asked Hawaiian senior executives what benefits the carrier is gaining from being publicly traded, and whether a stock buyback could be an option. After all, he notes, the carrier has a very healthy cash position that is close to its market capitalization (the airline reported unrestricted cash and cash equivalents of $433.5 million at the end of the third quarter). This situation seems to be begging for a buyback, Keay believes.
Of course, CEO Mark Dunkerley could not say much on this topic. But he did signal that management is also frustrated that the stock performance is not matching the airline’s positive financial performance. He agreed that there is “more innate value in our business than is indicated in its market capitalization,” and said that management is trying to figure out ways to get the message to resonate better with investors.
In response to more questions from Keay, Dunkerley reiterated that it is not appropriate for him to discuss share buybacks and whether the carrier should become private.
However, he did describe one of the advantages of being publicly-traded. It has meant that the company has, in the past, had access to capital when it was needed. And this could be important if credit markets tighten up again. From this perspective, “having an equity component that is publicly traded can be extremely useful to have.”
Dunkerley also noted that Hawaiian’s cash position is not excessive, particularly for a carrier with a lot of new aircraft arriving. If there is another dip in the broader economy, then having that cash cushion would put Hawaiian in a stronger position relative to its competitors.
CFO Scott Topping admits that Hawaiian’s cash position is “on the high side” compared to the rest of the industry. However, given its position and growth plans, this is an appropriate level. “I think we are where we want to be” in terms of cash levels. He said he would not characterize Hawaiian as being cash-heavy.
The day after the earnings call, Hunter Keay issued a research note to further expand on the question of Hawaiian’s undervalued stock. He notes that third-quarter performance was good, and the carrier is “flawlessly executing its network diversification strategy.” But despite strong earnings per share and top-line growth, “the stock won’t go up.” In fact, it has declined in value this year. “It is now the cheapest stock we cover on nearly all metrics.”
Further, Keay notes that there is little to suggest that this situation will change. “We fail to see what catalysts exist to make this stock work over the long term given how ignored it’s been since [Hawaiian] started growing in earnest in late 2010.”
He adds that Hawaiian management “is surely frustrated,” and “the lack of resonance with equity investors isn’t due to a lack of effort” by Hawaiian. Keay also reiterates in his note that when the frustrated management team “finally has had enough,” an option could be taking the company private. As well as its excess cash nearly matching the carrier’s market capitalization, he says that “given that money is historically cheap for airlines, a debt component of an equity buyout also seems reasonable.”