Hawaiian Electric is NOT a Bargain

Maui’s fires destroyed more than 2,200 buildings, leaving many homeless and $4 billion to $6 billion in losses.

At the center of the devastation sits Hawaiian Electric (HE), the local utility company accused of gross negligence.

Maui County sued the company, claiming they failed to power down their equipment ahead of the storm as well as maintain their power grid.

The embroilment sent searches for HE stock to the highest of any utility company by financial pros.

Like them, we wondered whether HE was a bargain at these prices or headed for bankruptcy.

Hawaiian Electric’s Business

Headquartered in Honolulu, Hawaiian Electric has serviced Hawaii customers since 1891.

Their operations span the major islands, providing 95% of the power to the island’s population.

As one of the leaders in renewable energy, HE generates roughly 1/3rd of its needs from renewable sources with a goal of 40% by 2030 and 100% by 2045.

What we found unusual was the company’s revenues come from two sources: electricity and banking.

Source: HE Investor Relations

Apparently, the company invests heavily in bonds ranging from government-backed to local Hawaii real estate.

If that sounds bonkers to you, it’s because it is. 

We aren’t aware of any other utility that holds such a massive portfolio of debt instruments unless it’s in leu of cash.

Aside from the Jack Welsh-style banking madness, HE is facing dozens of lawsuits from victims, claiming they failed to deenergize lines, which is valid.

Chances are, the company will need to go through bankruptcy.

Financials

Source: Stock Analysis

While the company did a nice job improving revenues over the years, we question how much of that came from their ‘banking’ unit.

The company also faced shrinking margins as higher labor and input costs grew faster than revenues.

HE doesn’t carry much debt, only around $2.3 billion. While that might sound good, it’s likely a warning sign of their ‘banking’ business model.

Valuation

Source: Stock Analysis

Relative to its peers, HE is cheap. 

We were surprised to see companies like Duke Energy (DUK) and NextEra Energy (NEE) trading at price multiples near 20x on earnings and over 10x on operating cash. That’s a bit rich with interest rates as high as they are, which typically pushes down the price of utility companies.

Growth

Source: Seeking Alpha

Analyzing the two more established players, DUK and Southern Energy (SO), the forward revenue growth from utilities suggests we are far from a recession. 

Positive forecasted EPS growth across the board, save for HE, confirms this assessment.

Profitability

Source: Seeking Alpha

HE’s margins aren’t the best, but they’re far from the worst.

However, it’s troublesome to see their return on equity, assets, and total capital so low given their ‘extra’ investments in debt instruments.

Our Opinion 0/10

If this company’s only risk was bankruptcy, we’d give it a 1 or a 2 just because it might survive.

But the abhorrent business model is a ticking time bomb waiting to go off.

Nothing good can come from a utility trying to operate like a regional bank.

It’s pretty likely they are forced to sell their bond holdings at a loss, accelerating their demise like Silicon Valley Bank.

If we could go below 0 on an investment, this would be the stock we’d do it for.

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