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3 Shipping Stocks Resilient to Coronavirus-Led Industry Challenges

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Maharathi Basu
·7 min read
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The coronavirus-induced slowdown in global trade has dimmed the outlook for the Zacks Transportation - Shipping industry. This is because the shipping industry is responsible for transporting the majority of goods involved in world trade and is rightfully considered the life line of the global economy.

Moreover, demand for oil and gas is still suppressed, thereby reducing the need for tankers. Despite these headwinds,industry players like Costamare (CMRE), Danaos Corporation (DAC) and Capital Product Partners (CPLP) are expected to benefit from the gradual increase in demand for transportation following the re-opening of economic activities.

Industry Overview

The companies housed in the Zacks Transportation - Shipping industry offer liquefied natural gas and crude oil marine transportation services under long-term, fixed-rate contracts with major energy and utility companies. Most participants focus on the seaborne transportation of crude oil and other oil products across the globe. The industry also features companies that own, operate and manage liquefied natural gas carriers.

3 Trends Defining the Transportation - Shipping Industry’s Future

Weakness in the Oil and Gas Market a Bane: The pandemic wreaked havoc on the shipping industry by substantially decelerating international trade. The coronavirus-induced demand disruption jeopardized the oil and gas market due to ramped-down oilfield activity and low oil prices. This, in turn, hurt companies like Kirby Corporation (KEX) significantly, which suffered depressed third-quarter revenues at its Distribution and Services segment by 30.7% to $176 million. Moreover, the segment reported 0.6% operating margin in the September quarter, comparing unfavorably with 3.6% in the prior-year quarter. Weakness in the Oil and Gas market is expected to persist at least in the near term due to limited activity, stemming from softness in oilfield spending. Despite the recent uptick, oil demand remains stressed.

Dividend Cut/Suspension Signals Uncertainty: The coronavirus pandemic dented the liquidity position of most companies and those in the shipping space are no exception. Due to this bleak demand scenario, many shipping companies resorted to dividend cut or deferral of dividend payment until the overall situation improves. While releasing third-quarter results, Frontline Limited (FRO) decided not to pay any cash dividend for the said period. The company’s board of directors attributed this stance to the near-term uncertainty. The company’s interim CEO Lars Barstad was quoted saying, "Q3 earnings were good but our visibility looking into Q4 doesn't look great. We are in the middle of a global pandemic. We decided to keep the cash." Another shipping company Navios Maritime Acquisition recently slashed its quarterly dividend payout by 83.3% to 5 cents per share.

Fitch Ratings 2021 Outlook Holds Out Hope: On a more positive note, leading credit rating agency Fitch Ratings upped its outlook on the global shipping industry from negative to stable. The better outlook is basically owing to improvements in container shipping and dry bulk sectors despite weakness in the tanker segment. The agency believes, prudent capacity management in the container shipping market should help companies gain traction from the partial rebound in demand across freight categories next year.

Zacks Industry Rank Indicates Gloomy Outlook

The Zacks Transportation - Shipping industry is a 42-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #233, which places it in the bottom 8% of 250 plus Zacks industries.

The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all-member stocks, indicates grim 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 the earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential.

While the industry’s earnings estimates for 2020 have decreased 23.2% in the past year, the same for 2021 has slumped 38.2%.

Despite the dull near-term prospects of the industry, we present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and its current valuation first.

Industry Lags Sector & S&P 500

The Zacks Transportation - Shipping industry has lagged both the broader Transportation Sector and the Zacks S&P 500 composite over the past year.

The industry has declined 35.7% over this period against the S&P 500’s growth of 17.4% and the broader sector’s increase of 15.8%.

One-Year Price Performance

The Valuation Picture

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), a commonly used multiple for valuing shipping stocks, the industry is currently trading at 4.5X compared with the S&P 500’s 16.17X. It is also below the sector’s trailing-12-month EV/EBITDA of 13.71X.

Over the past five years, the industry has traded as high as 13.21X, as low as 4.18X and at the median of 9.57X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

 

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio


3 Transportation – Shipping Stocks to Keep Tabs on

Danaos Corporation: This Athens, Greece- based company is benefiting from an expanded fleet and higher charter rates. The company’s recently-made ship acquisitions bode well. We are also impressed by its efforts to reduce the debt levels.

Despite the challenges dragging the shipping industry, Danaos has clearly been a standout as is evident from the stock’s significant surge of more than 100% over the past six months. The stock, currently sporting a Zacks Rank #1 (Strong Buy), has seen the Zacks Consensus Estimate for current-year earnings being revised 9.4% upward over the past 60 days.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: DAC

Costamare: We are impressed by this Monaco-based company’s strong cash flow generating ability. Its capacity to reward its shareholders through dividend payments even in these turbulent times is a positive. The company’s young fleet size is also impressive.

Shares of the company have soared more than 43% over the past six months. The stock, currently carrying a Zacks Rank #2 (Buy), has seen the Zacks Consensus Estimate for current-year earnings being revised 1% upward over the past 60 days.

 

Price and Consensus: CMRE

         

Capital Product Partners: We are impressed by this Athens, Greece-based company’s expanded fleet size following the acquisition of three 10,000 TEU containers earlier this year. The company’s ability to reward its shareholders through dividend payouts even during this economic turmoil is a boon.

Shares of the company have rallied more than 28% over the past three months. The stock, currently carrying a Zacks Rank of 2, has seen the Zacks Consensus Estimate for current-year earnings move 9.6% north over the past 60 days.

Price and Consensus: CPLP

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Kirby Corporation (KEX) : Free Stock Analysis Report
 
Frontline Ltd. (FRO) : Free Stock Analysis Report
 
Danaos Corporation (DAC) : Free Stock Analysis Report
 
Capital Product Partners L.P. (CPLP) : Free Stock Analysis Report
 
Costamare Inc. (CMRE) : Free Stock Analysis Report
 
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