3 Shipping Stocks to Bet on From a Challenging Industry
The Zacks Transportation - Shipping industry is facing challenges, ranging from high inflation-induced elevated interest rates, weak freight rates and supply-chain disruptions.
Despite the challenges, we believe that stocks like Kirby Corporation KEX, DHT Holdings DHT and Teekay Tankers TNK should grace one’s portfolio, given the improvement in the demand scenario from the pandemic lows. Declining fuel costs too represent a tailwind as far as bottom-line growth is concerned.
Industry Overview
The companies belonging to the Zacks Transportation - Shipping industry, which is cyclical in nature, offer liquefied natural gas and crude oil marine transportation services under long-term, fixed-rate contracts with energy and utility bigwigs. Most participants focus on the seaborne transportation of crude oil and other oil products, globally. The industry also includes players that own, operate and manage liquefied natural gas carriers. Some participants are owners and operators of containerships for charter. The change in the e-commerce landscape due to the coronavirus impact implies that shippers are relying more on third-party logistics providers. The well-being of the industry participants is directly proportional to the health of the economy. The resumption of economic activities after coming to a standstill due to COVID-19 bodes well for the industry.
4 Key Investing Trends to Watch in the Transportation-Shipping Industry
Supply-Chain Disruptions & Weak Freight Rates: Although economic activities picked up from the pandemic gloom, supply-chain disruptions continue to dent stocks in the industry. Increased operating costs are also limiting bottom-line growth. Costs will likely continue to be steep going forward due to supply-chain and labor troubles. Below-par freight rates are also hurting the industry’s prospects.
Economic Uncertainty Remains: Agreed that signs of easing inflation have brought some sort of relief for U.S. stock markets but the fact remains that we are far from being out of the woods. The Fed reinitiated its interest rate hike process in the July FOMC meeting after taking a breather in June. On Jul 26, the Fed raised the benchmark lending rate by 25 basis points to the range of 5.25-5.5%. This marked the highest range of the Fed fund rate since March 2001. With inflation remaining a formidable foe, risks associated with an economic slowdown and geopolitical tensions dampen the prospects of stocks belonging to this industrial cohort. Sluggish economic growth and inflationary woes are likely to hurt consumer spending in the remainder of 2023. Challenges in Europe are also hurting shipping volumes. These do not bode well for the industry participants.
Demand Weakness for Goods Out of China: Despite a pickup in economic activities and reopening of the Chinese economy, the fact remains that the country’s export volumes to the United States are dropping. With the shipping industry responsible for transporting the bulk of the goods involved in global trade, China’s export drop is a worry for the industry. In fact, demand for Chinese goods is waning globally, with consumer spending being hit by inflation, in addition to shifting of preferences from goods toward services.
Oil Price Decline: The decline in expenses on fuel represents another tailwind for the industry. Notably, oil price declined 6.6% in the April-June period. This bodes well for the bottom-line growth of shipping stocks. This is because fuel expenses are a significant input cost for any transportation player.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Transportation - Shipping industry is a 36-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #207, which places it in the bottom 18% of 250 plus Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates murky near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Evidently, the industry’s earnings estimate for 2023 has decreased 5.3% since February-end.
Before we present a few stocks that you may want to add to your portfolio. Let’s look at the industry’s recent stock-market performance and its valuation picture.
Industry Underperforms S&P 500 and Sector
The Zacks Transportation - Shipping industry has underperformed the Zacks S&P 500 composite index and the broader sector over the past year.
Over this period, the industry has inched up 1% compared with the S&P 500 Index’s northward movement of 8.9%. The broader sector has gained 5% in the same timeframe.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E- F12M), a commonly used multiple for valuing shipping stocks, the industry is currently trading at 5.67X, compared with the S&P 500’s 19.79X. It is also below the sector’s P/E (F12) ratio of 14.03X.
Over the past five years, the industry has traded as high as 34.12X, as low as 3.74X and at the median of 5.55X as the chart below shows.
P/E Ratio (Forward 12-Month)
3 Transportation - Shipping Stocks Worth Adding to Your Portfolio
Teekay Tankers is gaining from the resumption of economic activities and the uptick in world trade. This is because the shipping industry is responsible for transporting several goods involved in world trade.
The Zacks Consensus Estimate for current-year earnings has inched up 1% over the past 60 days. TNK currently sports a Zacks Rank #1 (Strong Buy). Shares of TNK have gained 90.4% in a year’s time.
You can see the complete list of today’s Zacks #1 Rank stocks here
Price and Consensus: TNK
Kirby is benefiting from the increased demand in its distribution and services segment. Favorable market conditions at its marine transportation unit are encouraging as well. KEX currently carries a Zacks Rank #2 (Buy).
The optimism surrounding the stock can be gauged from the fact that KEX shares have gained 28.1% in a year’s time. Over the past 60 days, the Zacks Consensus Estimate for 2023 earnings has moved 2.4% north.
Price and Consensus: KEX
DHT Holdings is benefiting from the optimism surrounding LNG charter rates. Efforts to reward its shareholders through dividends attest the company’s financial well-being.
DHT currently carries a Zacks Rank #2. DHT shares have surged 35% in a year’s time. The company has outshined the Zacks Consensus Estimate in two of the last four quarters, missing the mark in the other two. The average beat is 64.31%.
Price and Consensus: DHT
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Kirby Corporation (KEX) : Free Stock Analysis Report
DHT Holdings, Inc. (DHT) : Free Stock Analysis Report
Teekay Tankers Ltd. (TNK) : Free Stock Analysis Report
