Hawaiian Airlines (HA) began operations more than 90 years ago as a three-aircraft company flying between Maui and the island of Hawaii. The company’s combined capacity fleet has risen from this humble beginning to carrying nearly 12 million passengers annually between the islands, and other points in Asia and North America.

After a huge recent selloff due to coronavirus concerns, the company’s market capitalization is just $879 million, the lowest it has been in the past five years. The stock is now one of our favorite picks in terms of value stocks as we see valuation upside as substantial from today’s panic-driven lows.

Recent Results

Hawaiian reported fourth-quarter and full-year earnings on January 30^th and results were down from the prior year, as expected. Passenger revenue for the year declined slightly, driving fractionally lower total revenue, which came to $2.8 billion for the year.

Traffic, which is measured by revenue passengers flown, was down 0.8% to 11.7 million for the year. Revenue passenger miles rose 3.5% and available seat miles, which is a measure of capacity, rose 2%. With revenue passenger miles rising more quickly than capacity, the company’s load factor increased to 86.6%, which is industry-leading, and one of the reasons we like Hawaiian.

Unfortunately, this additional load factor came at the expense of pricing, as passenger revenue per available seat mile fell 2.2% to 12.63 cents in 2019. Salary and benefits costs continue to weigh on results, with that number rising 5.7% year-over-year. However, 2019 was kind to airlines with respect to fuel prices, and Hawaiian saw a favorable impact from the nearly-10% decline in fuel costs.

Earnings-per-share were $4.60 for 2019, down from $5.44 in 2018, although this decline was expected. We’re estimating $3.80 in earnings-per-share for 2020, which we believe prices in a moderate impact from coronavirus-related weakness. In addition, Southwest Airlines (LUV) continues to make progress in the Hawaiian markets, which will likely continue to crimp pricing power for all competitors, Hawaiian Airlines included.

Growth Prospects

We see Hawaiian producing 3.5% annual earnings-per-share growth in the coming years, which is well down from its historical performances, but we see good cause for caution. The entrance of Southwest into the Hawaiian markets is an unequivocal negative for Hawaiian Airlines, as its dominant market position is being threatened for the first time.

However, Hawaiian has done a nice job cutting costs and improve capacity efficiently, which is helping it to grow profitably. Hawaiian also buys back its own shares, which will help provide a small tailwind to earnings-per-share via a lower float over time. Even with Southwest coming into the Hawaiian markets, Hawaiian Airlines’ competitive position is undeniably dominant. This chart shows the company had more than 95% market share in inter-island routes, which is truly outstanding.

Valuation and Final Thoughts

The recent selloff has shares trading for just 5 times our 2020 earnings-per-share estimate of $3.80, which is lower than the valuations the stock traded for in the aftermath of the financial crisis. We see this valuation as pricing in too much bad news, and therefore find the stock to be a bargain.

Our fair value estimate is 7.5 times earnings, which we feel is sufficiently pricing in the risks the company faces. Even still, shares trade for just 67% of estimated fair value today.

With Hawaiian offering investors a bargain valuation and a market-beating yield of 2.5%, we see the stock as highly attractive for value and dividend investors. Hawaiian faces risks to be certain, but we see those risks as priced in and then some, making the stock a buy for those that can stand the volatility.