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Near-Term Outlook for Shipping Industry Not Enthralling

Maharathi Basu

The Zacks Transportation - Shipping industry comprises companies that provide 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, which is responsible for transporting a bulk of the goods involved in world trade, also includes companies that own, operate and manage liquefied natural gas carriers.

Let’s take a look at the industry’s three major themes:

  • Flourishing world trade is a major requirement for the growth of the shipping industry, which is often considered the lifeline of the global economy. However, the ongoing trade squabbles between the United States and China do not bode well for international trade. Trade wars are never beneficial as they eat into profit margins of companies, eventually crippling the overall economy. In the event of a slowdown in global trade, the shipping industry will be hurt badly. Investors fear that volume of cargo at sea could diminish due to tensions involving the two largest economies. In fact, trade war tensions have already hit the dry bulk sector badly with little hopes of recovery in the remainder of the year. Reportedly, China was the second-largest purchaser of U.S. agricultural products in 2017. However, the disputes between the countries resulted in a 53% decline in 2018, when China slipped to the position of the fifth-largest purchaser.
  • As with other transportation companies, increase in fuel costs do not bode well for shipping stocks. This is because expenses on fuel represent a key input cost for any transportation player. The situation is alarming for shipping stocks in this respect as fuel costs are expected to increase in the 25-40% range for the industry, as new International Maritime Organisation (IMO) rules take effect from January 2020. The regulations are aimed at reducing sulphur emission from ships. Many ships may then be forced to switch to the highly expensive marine gasoil, which are very low on sulphur content. Alternately, ships may install scrubbers (air pollution control devices), which would allow them to burn the less-expensive, high sulfurfuel oil. However, with not much time left for the new rules to be effective, many ships may not be able to install such devices before 2020. This is likely to result in limited compliance with the new rules. As a result, the entire industry may witness pandemonium, with new ways and means being devised to keep operational costs under control. 
  • The impressive balance sheets of most major companies in the space have enabled them to engage in shareholder-friendly activities. For instance, Golar LNG Limited (GLNG) hiked its quarterly dividend to 12.5 cents per share (50 cents annually) from 5 cents in August 2018. GasLog Ltd. (GLOG) also hiked its quarterly dividend payout by 7.1% in 2018. Moreover, the outlook for the LNG shipping market appears promising despite the ongoing volatility. According to shipbroker Banchero Costa, rates in the LNG shipping market should increase throughout this year owing to healthy demand.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Transportation - Shipping industry is a 69-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #146, which places it at the bottom 43% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak 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 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. Over the past year, the industry’s earnings estimate for the current year is down 25.5%.

Despite the dull scenario, we will present a few stocksthat can be bought considering their robust growth endeavors. Prior to that, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry Underperforms S&P 500 & Sector

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

Over this period, the industry has declined 17% versus the S&P 500’s gain of 8.3%. Meanwhile, the broader sector did not show any change.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing shipping stocks, the industry is currently trading at 8.56X compared to the S&P 500’s 11.26X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 7.62X.

Over the past five years, the industry has traded as high as 15.67X, as low as 6.66X and at the median of 11.19X.

 

Bottom Line

The ongoing trade dispute is a major headwind for the shipping industry that is highly dependent on world trade patterns. Slowdown in global trade due to macro disturbances has blurred the outlook for the industry. Moreover, the likelihood of a sharp increase in fuel costs from 2020, due to the implementation of IMO regulations to reduce sulphur emission from ships, is likely to hurt bottom-lines of these stocks going forward.

Despite the above headwinds, investors interested in this key industry may consider the following stocks based on their strong growth potential. The stocks have been witnessing positive earnings estimate revisions and carry a Zacks Rank # 1 (Strong Buy) or 2 (Buy).

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

StealthGas (GASS) provides international seaborne transportation services to LPG producers and users. The Zacks Consensus Estimate for the current year has improved 41.2% over the past 60 days. The stock sports a Zacks Rank #1.

Price and Consensus: GASS

Global Ship Lease (GSL) is a containership charter owner. The Zacks Consensus Estimate for the current year has been revised upward to the tune of 3.3% over the past 60 days. The stock sports a Zacks Rank #1.

Price and Consensus: GSL

Frontline Ltd. (FRO), based in based in Hamilton, Bermuda, engages in the seaborne transportation of crude oil and oil products worldwide. The Zacks Consensus Estimate for current-quarter earnings has improved 16.7% over the past 60 days. The stock carries a Zacks Rank #2.

Price and Consensus: FRO

 

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Global Ship Lease, Inc. (GSL) : Free Stock Analysis Report
 
GasLog LP. (GLOG) : Free Stock Analysis Report
 
Golar LNG Limited (GLNG) : Free Stock Analysis Report
 
StealthGas, Inc. (GASS) : Free Stock Analysis Report
 
Frontline Ltd. (FRO) : Free Stock Analysis Report
 
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