The companies belonging to 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 players that own, operate and manage liquefied natural gas carriers.
Let’s take a look at the industry’s three major themes:
The coronavirus outbreak spelled doom for the shipping industry, which is responsible for transporting the majority of goods involved in world trade and is rightfully considered the life line of the global economy. With world trade taking a severe hit, multiple sailings were canceled already. Moreover, vessels are being rapidly idled. In fact, Moody’s Investors Service has a negative outlook on the global shipping industry for the next 12-18 months due to the pandemic-related woes like economic disruption and declining manufacturing output. The rating firm expects the global economy to slow down further in the current year. What is more alarming is that it anticipates the road to recovery to be long and full of hurdles. In fact, Maria Maslovsky, vice president-senior analyst at Moody’s had said in July that “We now expect the aggregate EBITDA of rated shipping companies to fall by around 16-18% in 2020, nearly doubling from our previous projection of a drop of around 6-10%.” Per the report, the estimate for the dry bulk and container shipping segment is also drab due to excess supply.
The new emission rules imposed by the International Maritime Organization from Jan 1, 2020 to curb pollution caused by ships across the globe flared up operational costs for the shipping companies. In fact, the directive to use fuels with sulfur content below 0.5% is expected to result in nearly $50 billion worth additional fuel costs over the next three to four years. What is more startling are the findings of a recent survey for the industry. According to a Wall Street Journal article, an analysis of the shipping industry proved that due to the coronavirus crisis, most respondents will either cut or halt investments aimed at reducing emissions from ships, per the new regulations.
Despite the coronavirus adversity, the fact that some shipping companies maintained or hiked their quarterly dividend payouts only underline their financial strength. For Instance, Frontline Limited (FRO) increased its quarterly dividend payout by 75% in May from 40 cents per share. Costamare’s (CMRE) decision to sustain its quarterly dividend payout at 10 cents per share despite the dogging challenges is also impressive. Moreover, Frontline’s forecast that tanker demand will rebound next year also bodes well for the industry.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Transportation – Shipping industry is a 39-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #230, which places it in the bottom 9% of 250 plus Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the 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 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.
The industry’s earnings estimate for 2020 moved south 16.2% year over year. Before we present a few stocks that you may want to consider to buy or hold, let’s take a look at the industry’s recent stock market performance and its 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.
During this period, the industry has declined 39% compared with the broader sector’s decrease of 5.8%. Meanwhile, the S&P 500 has grown 9.1% in the same time frame.
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 10.74X compared with the S&P 500’s 12.12X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 7.65X.
Over the past five years, the industry has traded as high as 15.99X, as low as 6.53X and at the median of 11.02X.
The coronavirus pandemic beleaguered the shipping industry as world trade decelerated considerably. The near-term view for the industry is also bleak with the global economy expected to shrink further in the ongoing year.
Moreover, the new rules enforced by the International Maritime Organization Jan 1, 2020 onward to trim pollution induced by ships escalated operational costs tremendously. What is worse is that investments needed in implementing the rules may be curtailed or even suspended due to the coronavirus-related uncertainty.
Although the above-mentioned headwinds are likely to weigh on the near-term outlook, we are presenting three stocks from the industry, namely Martin Midstream Partners (MMLP), StealthGas (GASS) and Diana Shipping (DSX). While Martin Midstream Partners and StealthGas presently sport a Zacks Rank #1 (Strong Buy), Diana Shipping currently carries a Zacks Rank #3 (Hold).