Tax ruling cuts
HEI earningsA $24 million charge drags
net income down 50 percent
Hawaiian Electric Industries Inc. warned Wall Street that a $24 million charge was coming in the second quarter.
So when the state's largest utility and parent of American Savings Bank announced yesterday that net income had fallen about 50 percent from a year earlier, analysts instead applauded results that exceeded their consensus earnings-per-share forecast by 6 cents.
"Basically, I thought the quarter was pretty good, actually better than pretty good," said analyst David Schanzer of Philadelphia-based Janney Montgomery Scott LLC.
Hawaiian Electric, which took the $24 million charge for an unfavorable tax ruling involving American Savings' real estate investment subsidiary, had net income in the quarter of $11.2 million, or 14 cents a share, compared with $21.9 million, or 29 cents, during a year earlier.
Excluding the charge, second-quarter earnings would have been $35.2 million, or 44 cents a share. That beats the average of 38 cents a share of the four analysts surveyed by Thomson First Call.
"It was very promising that the Hawaiian economy and tourism numbers are as positive as they are," said Schanzer, who had expected earnings of 41 cents a share and had a "buy" rating and $53 price target on the stock prior to yesterday's report.
Robert Clarke, HEI's chairman, president and chief, executive, referred to the company's numbers as "solid" when excluding the tax adjustment.
"This performance resulted primarily from broad-based strength in the Hawaii economy that had positive effects on HEI's electric utility and bank subsidiaries' operating results," he said.
HEI, which is appealing the tax ruling, also paid $200,000 in related interest, as well as a state bank franchise tax of $1.2 million in the second quarter. The tax charge and other special items dragged down HEI's net income 48.6 percent from a year ago.
Revenues rose 2.9 percent to $461.8 million from $448.8 million.
The electric utility's net income for the quarter rose 17 percent to $21.7 million from $18.6 million a year ago, when the Iraq war's effects on tourism and increased expenses for retirement benefits cut into earnings. Electricity sales improved 2.8 percent in the quarter from a year ago.
The bank's earnings, hit by the charge, swung to a net loss of $6.9 million in the quarter from a gain of $13.5 million a year ago. Excluding the charge, American Savings' net income would have been $17 million in the quarter. Net interest income rose $1.2 million in the quarter.
Analyst James Bellessa Jr. of Great Falls, Mont.-based D.A. Davidson & Co., said he will keep his stock rating at "underperform" despite how the company exceeded his estimate of 8 cents, which would be 38 cents excluding the charge.
"Anything that helps the economy will help the utility," Bellessa said. "The results appear to have exceeded my forecast due to a reversal of a loan loss reserve at the bank that added 2 to 3 cents a share, and what appears to be a lower tax rate than we expected."
Still, Bellessa said he believes the stock's closing price of $26.50 yesterday is several dollars above what he thinks the shares are worth. His 12- to 18-month price target is $23.
Bellessa said his five-year target price for the stock is $26 -- roughly where it is now.
"I believe that the dividend is safe," he said. "So investors who own the shares and want to continue to receive that income at the current (yield) rate of 4.7 percent, if they have tolerance, they should stick with the stock. The average stock in the marketplace yields under 2 percent and here's something that yields 4.7 percent."
Hawaiian Electric Industries
www.hei.com