U.S. Markets close in 6 hrs 16 mins

Why Scorpio and Navios may not be that undervalued anymore

Xun Yao Chen, Industrials Analyst

Shipping stocks must-know: Outperformance and outlook for Scorpio and Navios (Part 8 of 8)

(Continued from Part 7)

Addition to earnings

With a possible increase of 85.9 million in earnings for Scorpio, on the idea that all ships that are going to be delivered in 2014 are operational for one year, and an addition of 20 million based on existing vessels, using the first half of 2013′s performance, Scorpio could be making 106 million, unadjusted for tax. Navios, on the other, could see its annual earnings potential grow from just 3 million to 21.5 million.

Forward PE multiple looks unattractive

With a current market cap of ~$402 million for Navios Maritime Acquisition Corp. (NNA) and $1.8 billion for Scorpio Tankers Ltd. (STNG), investors will be paying 17x to 18x for earnings generated from all the ships the companies will have by the end of 2014—if shipping rates stay constant. As S&P 500′s forward PE multiples for 2014 and 2015 at 13.6 and 12.3, NNA and STNG just look expensive.

Comparing our estimated PE with that of Wall Street analysts’, our PE multiples also appear to be higher. This tells us that existing construction activities have likely been priced in and that the market, as well as Wall Street analysts as a whole, are expecting higher shipping rates for the product tanker industry.

This could be negative for these two tankers because if shipping rates don’t recover as well as the market is currently expecting, they can have a negative impact on share prices. Nonetheless, as long as fundamentals continue to move in the right direction, earnings continue to grow because of higher rates and additional fleets. Higher share prices are just a matter of time for STNG and NNA.

Browse this series on Market Realist: