2024-01-12 17:17:45 ET
Summary
- Harbor Diversified has several catalysts that could generate a 70% return on the stock in 2024.
- Harbor owns Air Wisconsin, a regional airline partnering with American Airlines on shorter domestic U.S.
- The company recently repaid all its debt and could generate ~$20m in annualized earnings going forward.
- Expected fleet upgrades, aggressive stock buybacks, and substantial cash create a favorable setup for future growth at Air Wisconsin.
Harbor Diversified Inc., ( OTCPK:HRBR ), owner of regional airline Air Wisconsin, is my top stock pick for 2024 with the potential to deliver returns of 70%. The airline, which flies exclusively for American Airlines Group Inc. ( AAL ) has considerable momentum heading into the new year as it pays off debt, expands flying for American, and aggressively buys back shares with its substantial cash-on-hand.
Harbor recently announced that it fully paid off its outstanding debt on Dec. 27 for $46m, getting a 14% discount to the $52.6m liability it accounted for the debt (principal + future interest) on its balance sheet. This discount will boost Harbor's fourth-quarter earnings and provide additional flexibility for Harbor to sell aging unused CRJ-200 aircraft that served as collateral for the loan. Harbor's Air Wisconsin owns 64 regional jets and utilizes only around 44 planes due to an ongoing industry-wide pilot shortage. Selling parked planes could raise additional cash to support the purchase or leasing of new CRJ-700 planes to grow its routes for American Airlines.
Growing Flights for American Airlines
Refilling its pilot ranks as an industry-wide shortage eases and putting more planes in the air under the agreement with American Airlines inked in Aug. 2022 will provide a tailwind for revenue and should return Harbor to positive earnings after bearing the cost of transitioning from partnering with United Airlines Holdings, Inc. ( UAL ) to American Airlines in 2023. Harbor's Air Wisconsin laid the groundwork for upgrading its fleet from CRJ-200s to CRJ-700s by signing a new contract with its labor union in October 2023 and getting subsidies from Americans to boost pilot pay. The new labor contract, like the American agreement, specifically addressed the plane upgrade with union-leader Capt. Jack Roback stated : "The training section of the agreement will also enable the pilot group to be ready to fly newer, larger CRJ700 aircraft should Air Wisconsin acquire them in the future."
The CRJ-700s have become the plane of choice for regional competitors like Mesa Air Group, Inc. ( MESA ) and privately-owned GoJet Airlines over CRJ-200s as they can be fitted to increase capacity from 50 to 68 passengers or include premium cabins at a 50-seat configuration with increased storage. This provides a better traveler experience, especially for business-class passengers taking regional flights to connect to hubs before boarding longer-distance flights. Higher ticket prices for premium seats boost earnings for regional airlines and their larger airline partners per flight.
Based on reports from Air Wisconsin pilots on bulletin board forums, the training for CRJ-700 is already underway.
Cash Supports Buybacks, Fleet Upgrade
Harbor's substantial cash balance provides investors downside protection and will support Air Wisconsin in upgrading its fleet and growing earnings power. After the debt paydown, Harbor Diversified will now have ~$110m of cash + marketable securities on its balance sheet and no debt. That equates to $2.54 of cash per common share and $1.84 of cash per fully diluted share. Harbor could further boost its cash holdings with a positive ruling or settlement of its ongoing dispute with United Airlines over $52m owed to Harbor that United withheld. In its latest 10-Q filing , Harbor said it believes it is due the entire $52m and expects a ruling on the arbitration in the first quarter of 2024.
The company is also continuing to repurchase stock at today's attractive prices with a $1m increase in its buyback authorization each month. Without any future debt obligations, Harbor should continue to buy back as many shares as possible based on limited trading volumes. At the end of Q3, Harbor had $8.8m available under its stock repurchase plan and has bought back more than 14% of its outstanding common shares since March 2021.
(Source: Harbor Diversified 10-Q for 3Q2023).
Earnings Power and Valuation Going Forward
I expect Harbor Diversified to be able to generate $20m of earnings annually (33 cents per share) going forward under the current American Airlines contract. That earnings power could grow if Air Wisconsin is successful in hiring more pilots to utilize more planes and upgrades to CRJ-700 planes. The cost of upgrading planes could be partially or wholly offset by selling older CRJ-200s.
Investors could re-rate Harbor's stock as that earnings power becomes more apparent this year. By putting a 5x multiple on $20m of annual earnings power and giving credit for Harbor's $110m of cash + securities on its balance sheet, Harbor Diversified could be worth $210m or $3.50 per share. That would be a 70% increase from its recent trading price of $2.06.
That valuation could prove conservative if Harbor wins or settles favorably its $52m dispute with United Airlines, which is not included in its current cash balance, or the company's earnings power increases from a fleet upgrade. Potential downside risks include maintenance cost increases from running its older fleet or if its relationship with American Airlines sours.
Going into 2024, Harbor continues to grow its partnership with American and pursue shareholder-friendly measures like buybacks and fleet upgrades. New shareholders or those who held through the transitional 2023 should be rewarded with strong returns in the year ahead.
Risks for Microcap Stocks like Harbor
Given Harbor's market cap of around $100m, lack of trading volume, and listing on an over-the-counter exchange, investors should carefully consider if this stock is right for them. Being a smaller company means it faces greater risks if there's an incident such as a plane accident or union strike. As with other microcap investments, using limit orders to buy or sell shares is a good practice and investors should be careful to scale the investment at a size appropriate to their own risk tolerance as part of an overall diversified portfolio.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
For further details see:
Harbor Diversified: Top Pick For 2024 Takeoff