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Shipping Industry Outlook: Positive Signs Amid Cost Headwinds

Zacks Equity Research

The Zacks Transportation - Shipping industryincludes companies that 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 includes 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 — the two largest economies — bode well for the industry. Moreover, Chinese authorities are undertaking several initiatives like improving credit availability for smaller companies. Positive news on the trade war front and initiatives taken by China to stabilize its economy are likely to prevent a global recession. Consequently, demand for commodities from key emerging markets is likely to get a boost. As a result, international trade — a key catalyst for growth — will flourish and help the industry, which is often considered the lifeline of global economy.
  • According to a Reuters report, shipping fuel costs will increase by 25% in 2020, following the implementation of rules to check pollution by ships. Many ships may then be forced to switch to the highly expensive marine gasoil. The anticipated rise of approximately $24 billion a year is expected to increase operational costs of ships significantly. 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 effected, 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 confusion, with new ways and means being devised to keep operational costs under check.
  • 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. Additionally, the fact that the Baltic Dry Index (a gauge of the shipping costs of raw materials such as iron ore, coal and grain) is currently in a much healthier shape, compared with the record-low reading of 290 witnessed in February 2016, is a positive for the industry.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Transportation - Shipping industry is a 46-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #77, which places it at the top 30% 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 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 12% year over year. 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 12.1% versus the broader sector’s loss of 3.4% and the S&P 500’s gain of 1.6%.

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 10.88X compared to the S&P 500’s 10.63X. It is also above the sector’s trailing-12-month EV/EBITDA of 10.35X.

Over the past five years, the industry has traded as high as 16.79X, as low as 6.56X and at the median of 10.90X.




Bottom Line

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

However, operating costs 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, two sporting a Zacks Rank #1 (Strong Buy) and another carrying a Zacks Rank #2 (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, engages in the seaborne transportation of crude oil and oil products worldwide. The Zacks Consensus Estimate for current-quarter earnings has improved by 54.5% over the last 60 days. Additionally, the company has expected 2019 earnings growth of more than 100% on a year-over-year basis. The stock carries a Zacks Rank #1.

Price and Consensus: FRO


Teekay Tankers Ltd. (TNK ) ,  based in Hamilton, Bermuda, provides international marine transportation of crude oil.  The stock currently has a Zacks Rank #1 and expected earnings grow rate in excess of 100% year over year for 2019. The Zacks Consensus Estimate with respect to the bottom line for 2019 has improved to earnings of 4 cents from a loss of 5 cents 60 days ago.

Price and Consensus: TNK


GasLog Ltd. is an owner, operator and manager of liquefied natural gas carriers. The Zacks Consensus Estimate for current-quarter earnings has improved by 16.7% over the last 60 days. Additionally, the company has expected 2019 earnings growth of more than 100% on a year-over-year basis. The stock carries a Zacks Rank #2.

Price and Consensus: GLOG


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