PSB Monthly Issue July 2011

| July 5, 2011

July 2011


As investors, we’re told to avoid airlines during recessionary periods.  It’s something of a cliché at this point.  How could airline travel possibly thrive when people have less money to spend?

Don’t get me wrong, there’s some truth to the “airlines are bad in recessions” line.  It’s especially relevant for bigger airlines, who can have trouble turning a profit even in prosperous times.

But that doesn’t mean regional airlines fall into the same category.

In fact, they may even provide some excellent profit opportunities.

I’ll get back to that in a minute.  First, let’s take a closer look at the regional airline industry…

The regional airline business has been growing consistently for over 15 years.  In fact, regional airline passenger boardings have increased by 100% since 1995.

Today, one out of every four air travel passengers in the US is flying on a regional airline.  That’s a much higher percentage than most people realize.

What’s more, regional airline travel is still growing.

Based on the most recent statistics, 2010 revenue passenger miles (a common way to measure the volume of air passenger transportation) is expected to climb to $75 billion.  That’s a small but meaningful increase from 2009’s $73 billion.  It shows more consumers are willing to spend on flying.

And it looks to get even better in 2011…

If the economy improves in the second half of the year, like most economists expect, we could see a major boost in air travel.  It makes sense.  When consumers aren’t worried about losing their jobs, they tend to travel more.

Better yet, I know of a great way to take advantage of the growth potential in the regional airline industry.

Look no further than Hawaiian Holdings (NASDAQ: HA).

Now let’s take a closer look at this high flying company…

Key Investment Data

Name:  Hawaiian Holdings
Ticker Symbol:  HA
Market Cap:  $297.9 million
Recent Price:  $5.91

PSB Rating System 4.8 Stars

Raging Revenue:  (4.7 stars) Last quarter’s revenues jumped by 23%, right on target with expectations. And the outlook for 2012 is strong.

Beautiful Books:  (4.9 stars) Earnings are expected to climb 47% in 2012.  And better than expected demand could drive that estimate even higher.  The balance sheet is solid with $323 million in cash.

Stellar Structure:  (4.8 stars) Institutional ownership is extremely strong at 85% of shares out-standing.  Institutions are clearly confident in the company’s future.

Valuation Verification:  (4.9 stars) Despite a healthy growth outlook, the stock is dramatically under-valued.  Based on our valuation analysis, we think the stock is worth at least $11.80 a share.  That’s upside potential of 100%.

Meaningful Milestones:  (4.7 stars) The Department of Transportation recently rated HA as the number one carrier for on-time performance and fewest flight cancellations.  Now that’s a well run airline!


HA is a holding company for Hawaiian Airlines, a regional airline based on travel to, from, and within the Hawaiian Islands.  The airline’s routes fall into three main categories – routes to the Western US, routes to the South Pacific, and inter-island travel amongst the Hawaiian Islands themselves.

The company is the second busiest airline serving Hawaii in general.  But, they’re the dominant leader in terms of inter-island flights.  And overall, they’re the 13th largest US-based airline.

So what makes HA a better company than other airlines?

Here are a few things I really like…

First off, the company just launched services to South Korea.  Not only do new routes provide additional revenues, but South Korea in particular is a huge growth market.  It’s one of the world’s up and coming economic powers.

And HA really stands to gain off this expected growth.

What’s more, in 2010, HA added service to Japan.  And it’s been so successful that starting this month, the company is offering non-stop flights from Osaka to Honolulu.

An airline doesn’t offer non-stop service unless it’s a widely traveled route.  Keep in mind, Hawaii is an extremely popular vacation destination for Japanese tourists.  Clearly, the additional routes to Japan have been lucrative.

And one more thing…

In early 2011, the Department of Transportation rated Hawaiian Airlines as the number one carrier for on-time performance and fewest cancellations.  Only a well run airline is going to achieve those accolades.  And it’s a great sign of a healthy business.

Sounds like a good company, right?  Well, we haven’t even gotten to the best part… the financial numbers.


Let me be as straightforward as possible, HA has amazing financials.  Nearly every financial aspect of this company is strong… particularly noteworthy in the often financially challenged airline industry.

In the most recent quarter, revenues increased a solid 23% year over year.  But what’s really impressive is the earnings growth… a whopping 296% jump from last year’s net income.

Now that’s what I call growth.

Much of it is due to the new services to Japan and Korea.  Of course, an improving economy is also leading to more airline travel in general.  Moreover, analysts expect HA to grow at a stellar 47% next year.

And there’s even better news…

HA has a superb balance sheet.

The company has over $323 million in cash, compared to just $196 million in debt. That may not seem like anything special… but it’s actually quite impressive.  You see, most airlines are overloaded with debt.  And it’s rare to find any airlines with more cash than debt.

Only a superbly run airline is able to carry more cash than debt.  That really shows the quality of HA’s management.


As with any investment, Hawaiian Holding has its risks.

A global economic slowdown could reduce overall air travel.  Fewer consumers booking flights could potentially impact the company’s revenue.

Another risk is the potential for much higher crude oil prices ahead.  Higher oil prices could increase HA’s jet fuel costs by a significant amount.

And, if additional competitors enter the routes flown by HA, there’s the possibility of reduced revenue for the company.


Here’s the best thing about HA…

The company’s shares are trading at an extreme discount.

Currently, HA is trading at a miniscule 2.7x earnings.  No matter how you measure it, a2.7 P/E ratio is extremely low for a company expected to grow earnings 47% next year.  And it’s shockingly low compared to the regional airline industry average P/E of 15.7x.

If HA merely trades up to the industry average P/E, we could see a gain of 481%!

Even if we factor in HA’s projected growth, the company’s trading at a very reasonable 7.7x earnings.  If the shares trade to the industry average, we’re looking at an outstanding 100% return.

Now that sounds like an investment to get excited about.

Based on our analysis, we see the stock trading up to at least $11.80.  Buy HA now for gains of 100%!


BUY Hawaiian Holdings (NASDAQ: HA) up to $6.25 per share.

Recent price is $5.91.

Use a stop-loss of $4.00 on this position.

Don’t forget your position sizing and stop-loss rules.



Recessions typically force consumers to find ways to cut their budgets.  And the recent economic downturn is no exception.  It’s times like these when it makes sense to get rid of anything you’re not using.

Take for example, your “hard-wired” home phone.  Many people are tossing out their answering machine and cutting the “cord.”

In fact, in 2010 over 22% of US homes shut off their “wired” home phone lines and started using cell phones exclusively.  That trend is continuing this year.

But cell phones have their limitations.  Everyone’s familiar with dropped calls and bad connections.  What’s more, cell phone plans can get pricey at times, particularly if you make a lot of international calls or use lots of minutes.  Simply put, sometimes a home phone line is the better option.

So, wouldn’t it be better to have both?  Well, fortunately there’s another option.

I’m talking about phone service using voice over internet protocol (VOIP).  In other words, using an internet connection to make phone calls all over the globe.

With VOIP, consumers can access internet phone services anywhere in the world – regardless of how they’re connected – 3G, 4G, cable or even DSL networks.

These days, consumers are flocking to VOIP phone service… and for good reason.  It’s low cost, has an incredible suite of features, and has the ultimate portability.

So you’ll be glad to know…

Within the VOIP industry, we found a truly exceptional company.

I’ll get back to them in a minute.  First, let’s take a closer look at the telecom industry in general…

The telecom industry is a huge, widely followed industry. More importantly, “telecom” is experiencing robust growth.

In fact, the Telecommunications Industry Association (TIA) is projecting steady global telecom market growth in the next few years, producing an estimated $4.9 trillion in revenue in 2011.

And in the US, the telecom market is expected to see a 7.2% compound annual growth rate through 2011- with a projected 12.5% increase globally.

Many of the major telecom companies have merged over the last 10 years in an effort to offer additional products and service portfolios.  You’ve probably heard about the proposed merger between AT&T (T) and T-Mobile.

Mergers like these wouldn’t happen unless the companies involved strongly believe in the industry’s potential for growth.

But here’s the thing…

The merger craze hitting the industry isn’t necessarily the best thing for customers. Fewer competitors could lead to higher phone bills.  And wireless service can already be expensive.

That’s where home lines come back into the picture.

But it’s not quite that simple.

With the development of alternative phone services, demand for wired-lines has sunk to new lows.  In fact, revenue has plummeted more than 54% in the last decade! What’s more, revenue is expected to decline an additional 37% over the next 10 years.

In other words, traditional “land lines” are on their way to extinction.

And that’s where VOIP comes in…

Earlier I told you I had found a great VOIP company.  That company is none other thanVonage Holdings (NYSE: VG).  Let’s take a look under the hood…

Key Investment Data

Name:  Vonage
Ticker Symbol: VG
Market Cap: $1.0 billion
Recent Price: $4.54

PSB Rating System 4.7 Stars

Raging Revenue:  (4.6 stars) Analysts expect company revenue to grow by 21% in 2011.  Not too shabby in a challenging economy. And next year looks even stronger.

Beautiful Books:  (4.7 stars) Recent quarterly earnings shot up 51% year over year.  And we’re expecting a 23% gain for 2012, climbing to $0.42 per share.  In addition, the balance sheet is improving with $79 million in cash.

Stellar Structure:  (4.7 stars) Institutional ownership is very solid at 51% of shares outstanding.  The smart money clearly expects big returns from these shares.

Valuation Verification:  (4.8 stars) Despite a robust growth outlook, the stock is dramatically undervalued. Based on our valuation analysis, we think the stock is worth at least $7.14 a share.  That’s upside potential of at least 57%.

Meaningful Milestones:  (4.7 stars) The company is pilfering customers hand over fist.  Outstanding, featured-packed services continue to win customers from the major phone carriers.


Vonage provides domestic and international calling to residential and small business customers.  The majority of their subscribers are in the US, Canada, and the United Kingdom.

VG offer’s multiple plans tailored to meet the individual customer’s needs… from basic residential service to premium unlimited plans… Vonage has got the goods.  Not only are they dialing up the discounts, but they offer a host of outstanding features too.

Here’s what I really like about the company…

    • Technology Simplified – anyone can set it up… just connect the Vonage adapter to your touchtone phone, plug into the internet, and you’re in business.


    • Pricing Advantages – plans starting below $12… most other carriers don’t even come close!


    • Portability and Mobility – with an internet connection and adapter, you have access anytime, anywhere in the world.


  • Extra Features – voice messaging, caller ID, call waiting, conference calls, call forwarding, and voice to text messages… you name it, and all included at no extra charge.

And if that isn’t enough to convince you, check this out…

Vonage is already capturing customers from some of the industry’s major players.  In fact, over the last few years, VG has lured in over 2.4 million customers!

It’s true…big telecom companies are losing revenue to Vonage as they continue to chip away at “big telecom’s” customer base.

Now, let’s take a look at the financial numbers…


Let me get right to the point, Vonage is having an incredible year.

In fact, analysts estimate company revenue will grow by a healthy 21% in 2011.  On top of that, most recent quarterly earnings are up over 51% year over year.  As you might expect, that’s a great sign.

More importantly, Vonage is on track to earn $0.34 per share.  That’s up from a loss of $0.40 per share a year ago.  Now that’s an impressive turnaround.

And next year is projected to be even better.

Analysts are estimating the company will generate $0.42 per share… a stellar 23% annual increase!  Clearly, VG is in full-on growth mode.

Regarding the balance sheet, Vonage still has some work to do to get it into tip-top shape.  But they’re headed in the right direction.

The company’s has some debt on their books… but it isn’t an unreasonable amount for a telecom company.  Moreover, their operating cash flow is strong.  So, they’re in no danger of struggling to make payments.

It’s just a matter of time before VG’s balance sheet is as impressive as their earnings growth.


Of course, as with any investment, Vonage involves some risk.

The company’s success is dependent upon their ability to attract customers away from existing providers such as AT&T (T) and Verizon (VZ).  Failure to do so could impact the company’s growth.

Vonage also competes against established alternative communication providers, such as Skype, Google Voice, Magic Jack – companies offering less robust but low priced communication solutions.

Also, if new technologies emerge with competing voice and messaging services at lower prices, it could hurt VG’s business.

Nevertheless, we think now’s the time to grab shares of VG.


Vonage is significantly misvalued by the market.

At a recent price of $4.54, VG is trading at just 11.4x projected earnings.  But the industry average is running significantly higher at 30x earnings.  If VG simply trades at the industry average, the share price would jump to $11.94… a whopping 163%!

Trading in line with the industry is possible, but let’s take a more conservative 21x multiple for a target price.  That works out to $7.14 per share, or an incredible 57% potential return!

The stock is currently down about 16% from its 52-week high of $5.39, making for a nice low-risk entry point.

Based on our analysis, we see the stock trading up to at least $7.14.  Buy VG now for potential gains of 57% or more.


BUY Vonage (NYSE: VG) up to $5.00 per share.

Recent price is $4.54.

Use a stop-loss of $3.25 on this position.

Don’t forget your position sizing and stop-loss rules.


Portfolio Update

  • Despite a challenging month for stocks, NetSol Technologies (NTWK) is on the rise.  In fact, our position in NTWK is up a solid 23% in just a month.  Not too shabby!  With the recent climb, the shares have moved out of buying range. We’re moving NTWK to a hold.  Hang on for bigger gains ahead.


Category: PSB Monthly Issues

About the Author ()

Comments are closed.