There was a lot of red on my screen Thursday, and it was not a good day for smaller names, as evidenced by the performance of the Russell 2000 (down 2.3%) and Russell Microcap (down 2.8%).
One of the exceptions was tiny Harbor Diversified (HRBR) (up 2%), a little-known holding company which happens to be the the parent company of Air Wisconsin, a regional partner of United Airlines (UAL) .
This has been a fairly solid purchase so far, at just under $2/share in late January. While I knew I was buying a potential asset play, it was also one with significant risk. The company's recently released 10-K provides a much-needed update on the company; outside of SEC filings, it is difficult to get much information on Harbor Diversified.
Harbor Diversified ended the year with $176 million, or about $2.50/share, in cash and short-term investments (up from $170 million, or about $2.40/share at the end of the third quarter) and $71.8 million in debt (down slightly from $72.4 million). That puts net cash/short-term investments per share at about $1.47 -- significant given that HRBR closed at $2.43 on Thursday. (Note: I am including the company's Class C Convertible Redeemable Preferred Stock, immediately redeemable into 16.5 million shares in any calculations).
The potential sweetener here is company ownership of 64 CRJ-200 regional jets (unchanged since Q3), which have 50 seats. Essentially, for the current price of $2.43, investors are theoretically buying $1.47 in cash and investments, plus a stake in 64 jets.
In 2021, Harbor Diversified generated $248 million in revenue, and earned $92.6 million, or $1.29 per diluted share. If that seems ridiculous considering the current stock price, it did include $66 million from the Treasury's Payroll Support Program. Excluding that, which I consider a "one-time" event, my "back of the envelope" calculation would put fully diluted earnings per share at about $0.43. That would imply a trailing price-earnings ratio of just over 5.5.
The biggest issue for Harbor Diversified remains United Airlines' intention to reduce or discontinue the use of 50-seat aircraft -- the same type Air Wisconsin utilizes. The current agreement with United expires in February 2023, although Harbor Diversified has reported that negotiations continue to extend that agreement, or enter into a new one. Air Wisconsin has also been exploring options to upgrade its fleet, and potentially converting the current jets into freighters.
All of the uncertainty is likely the reason that Harbor Diversified currently trades at just 0.64x book value. It does not appear to be priced as a going-concern, but rather as an entity that will be broken up, with the pieces (in this case jets) sold off.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider HRBR to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)