he 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 industry players focus on the seaborne transportation of crude oil and other oil products across the globe. The industry also includes entities that own, operate and manage liquefied natural gas carriers.
Let’s take a look at the industry’s three major themes:
The coronavirus outbreak has spelt 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. The global health peril spawned the gravest crisis since 2009 according to many container ship operators.With world trade taking a severe hit, multiple sailings have been canceled already. Moreover, vessels are being rapidly idled.
The recent increase in tanker freight rates following Saudi Arabia’s decision to charter multiple super-tankers for shipping crude oil to customers across the globe has boosted shipping stocks. Evidently, VLCC or very large crude-oil carriers tanker rates along the Middle East Gulf-China route more than doubled recently with oil prices tumbling. Moreover, the impressive balance sheets of most major companies in the space enabled them to engage in shareholder-friendly activities.
The new emissions standards imposed by the International Maritime Organization from Jan 1, 2020 onward are aimed at curbing pollution caused by ships across the globe. Under the new rules, shipping companies are required to use fuels with sulfur content below 0.5% as opposed to the existing 3.5%. In fact Kitack Lim, secretary general, IMO, expects the benefits of these new rules to be felt soon and their implementation a smooth process.
Zacks Industry Rank Indicates Sunny Prospects
The Zacks Transportation – Shipping industry is a 40-stock group within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #110, which places it in the top 43% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, 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 11.8% since Mar 31, 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 39.5% compared with the broader sector and the S&P 500’s decrease of 28% and 11.6%, respectively.
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 12.01X compared with the S&P 500’s 9.35X. It is also above the sector’s trailing-12-month EV/EBITDA of 6.21X.
Over the past five years, the industry has traded as high as 15.24X, as low as 6.47X and at the median of 10.76X.
The recent plunge in oil prices and the subsequent rise in tanker rates bode well for the shipping industry. The solid capital disciplines of most industry players are also a positive in these coronavirus-induced tough times. The health hazard threatens to jeopardize world trade, which in turn, is very damaging to the shipping industry.
However, the recent enforcement of the new regulations to control sulfur emissions that ships can release is another upside.
Below we present three stocks, each sporting a Zacks Rank #1 (Strong Buy). All are well positioned to grow despite challenges. You can see the complete list of today’s Zacks #1 Rank stocks here.
Frontline Ltd. (FRO), 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 8.3% over the past 60 days. Additionally, the company expected 2020 earnings growth of more than 100%, indicating a substantial surge from the year-ago reported figure.
Price and Consensus: FRO
Costamare (CMRE) owns and charters containerships to liner companies worldwide. The Zacks Consensus Estimate for current-year earnings has improved 12.9% over the past 60 days. Additionally, the company expected 2020 earnings growth of more than 15%, implying a rise from the year-earlier reported figure.
Price and Consensus: CMRE
StealthGas (GASS) provides international seaborne transportation services to LPG producers and users. The Zacks Consensus Estimate for the current year has improved 47.8% over the past 60 days. Additionally, the company expected 2020 earnings growth of more than 100%, suggesting a significant increase from the prior-year reported number.
Price and Consensus: GASS