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Near-Term Outlook for Shipping Stocks Appears Enthralling

Maharathi Basu

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.

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

  • The recent positive developments pertaining to the trade war between the United States and China bode well for the industry as it is responsible for transporting the majority of goods involved in global trade. In fact, expectation of a partial trade deal between the above-mentioned countries this year has buoyed stocks. Recently, President Donald Trump hinted at the Economic Club of New York that a U.S.-China trade deal “could happen soon.” In fact, the United States is expected to sign a phase one trade deal with China shortly. In the event of materialization of a U.S.-China trade war truce, international trade — a key catalyst for growth — is anticipated to flourish, which should help the shipping industry, often considered the lifeline of global economy.
  • As with other transportation companies, increase in fuel costs does not bode well for shipping stocks. This is because fuel prices comprise a substantial input cost for any transportation company. 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 given that the International Maritime Organisation is set to impose new emissions standards from Jan 1, 2020. The regulations are aimed at curbing pollution caused by ships across the globe. Once the new rules become effective, shipping companies will be required to use fuels with sulfur content below 0.5% as opposed to the existing 3.5%. With not much time left for the new rules to come into effect, shipping companies are looking at various ways to comply with the rules and keep operational costs under control at the same time. For example, many ships are installing scrubbers (air pollution control devices), which would allow them to burn the less-expensive, high sulfurfuel oil. However, the paucity of time means that 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.
  • The recent increase in key measures like crude tanker and dry bulk rates has boosted shipping stocks. Despite some pullbacks, the rates should climb at least in the near term owing to limited supply growth despite demand pressure. 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 15 cents per share (60 cents annually) from 12.5 cents in November 2018.

Zacks Industry Rank Indicates Sunny Prospects

The Zacks Transportation - Shipping industry is a 43-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #24, which places it at the top 9% 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 bright 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have gained confidence in this group’s earnings growth potential.

The industry’s earnings estimate for the current year has increased in excess of 100% year over year since Jun 30, 2019. Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry’s Stock Market Performance

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 3.4% versus the broader sector and the S&P 500’s gain of 1.8% and 12.4%, respectively.

One-Year Price Performance

 

The Valuation Picture

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 9.87X compared to the S&P 500’s 11.23X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 7.52X.

Over the past five years, the industry has traded as high as 15.44X, as low as 6.49X and at the median of 9.71X.

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

 

Bottom Line

The recent progress related to the U.S.-China trade squabble bodes well for the shipping industry. Resolution of the dispute between the two largest economies across the globe would benefit the industry and strengthen global trade.

However, operating expenses of companies might increase significantly from 2020, following the implementation of the new rules to control sulfur emissions that ships can burn. This is likely to result in limited compliance with the new rules as companies try out new ways to keep their operational expenses under check.

Below we present three stocks, sporting a Zacks Rank #1 (Strong Buy), which are well positioned to grow amid challenges. You can see the complete list of today’s Zacks #1 Rank stocks here.

Frontline Ltd. (FRO), based in based in Hamilton, Bermuda, focuses on seaborne transportation of crude oil and oil products globally. The Zacks Consensus Estimate for current-year earnings has improved in excess of 100% over the past 30 days. Additionally, the company has expected 2019 earnings growth of more than 100% on a year-over-year basis.

Price and Consensus: FRO


Costamare (CMRE) owns and charters containerships to liner companies worldwide. The Zacks Consensus Estimate for current-year earnings has improved 25.7% over the past 30 days. Additionally, the company has expected 2019 earnings growth of more than 100% on a year-over-year basis.

Price and Consensus: CMRE


Star Bulk Carriers (SBLK) provides seaborne transportation solutions in the dry bulk sector. The Zacks Consensus Estimate for current-year earnings has improved in excess of 100% over the past 30 days. Additionally, the company has expected 2020 earnings growth of more than 100% on a year-over-year basis.

Price and Consensus: SBLK


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Star Bulk Carriers Corp. (SBLK) : Free Stock Analysis Report
 
Golar LNG Limited (GLNG) : Free Stock Analysis Report
 
Frontline Ltd. (FRO) : Free Stock Analysis Report
 
Costamare Inc. (CMRE) : Free Stock Analysis Report
 
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