Review of Hawaiian Electric Industries (HE)

HE came to my attention through a Jan. 10 post by Stockerblog, “Electric Utilities that Benefit from Lower Oil Prices“. Hawaiian Electric’s energy sources for electricity generation are Oil, 61%, Purchased Power, 39%, and according to Value Line fuel costs are 50% of their revenues, so Hawaiian Electric seems likely to benefit from the recent sharp drop in the price of oil.

But HE is more than a utility supplying electric power to the Hawaiian Islands. HE also provides banking and other financial services to consumers and businesses through its subsidiary, American Savings Bank, with 64 branch offices in the Islands. Hawaiian Electric Industries was founded in 1891. The stock currently yields 4.62% and has paid a dividend continuously since 1901. HE has an historic performance profile similar to the S&P 500 but it has been less volatile, beta .73.

Several factors have been working together to keep Hawaiian’s stock price down. The company has been adversely affected by prolonged delays on their rate hike requests and they have not been able to earn a decent rate of return from electricity sales. The escalation of oil prices in recent years has made things even more difficult. Their banking subsidiary has been experiencing increased competition.

My first round of number-crunching for HE at Yahoo Finance resulted in a favorable impression. Price to earnings and price to book value ratios appeared satisfactory, and the stated current ratio of 11.351 really caught my attention. However, upon turning to the balance sheet for confirmation, I discovered that this is a mistake which overstates the results by a factor of ten. The current ratio for the most recent year, 2005, is actually 1.14. This is in a range comparable to many other banks and utilities, but far below the 2.0 level which would indicate good financial strength. It is noteworthy that the current ratio also shows a sharp deterioration from the results obtained in 2004 and 2003. My impression is that the current ratio for 2006 will be even worse, suggesting the possibility that a dividend cut may become necessary. Company officers have been selling their stock too. Although two directors bought a little last October, company officers have been heavy sellers. Hawaiian Electric’s daily price chart does not inspire confidence either. In my opinion, lower oil costs are not enough of a catalyst to make Hawaiian Electric an attractive investment.


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