The economic disruption caused by the coronavirus outbreak and the resultant slowdown in global trade have dulled the outlook for the Zacks
Transportation - Shipping industry. With the industry being responsible for transportation of a high proportion of goods involved in world trade, the demand-weakness due to the pandemic no doubt induced a huge setback for the space.
As the pandemic-led headwinds are persistently hurting tanker spot rates and the rates for gas carriers, container shipping is currently the sole bright spot. Congestion in the Suez Canal at March-end further pushed up the container rates. Players like
Costamare ( CMRE Quick Quote CMRE - Free Report) , Danaos Corporation ( DAC Quick Quote DAC - Free Report) and Global Ship Lease ( GSL Quick Quote GSL - Free Report) are expected to benefit from the gradual uptick in demand for transportation following the resumption of economic activities. Industry Description
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 includes players that own, operate and manage liquefied natural gas carriers.
3 Trends Defining the Transportation - Shipping Industry’s Future Container Shipping Likely to Continue Flourishing: The containership market is being aided by increased manufacturing activities in Asia in addition to inventory restocking and greater demand for goods rather than services in Europe and the United States. The already high container rates were pushed further northward by the Suez Canal crisis since multiple containership vessels were either stuck or were diverted around South Africa, thereby eliminating or cutting the supply of ships and containers. In fact, shipowners like Costamare and Danaos are likely to gain further traction from the higher rates as container capacity is likely to get even tighter due to the incident. With demand for containerized goods expected to remain strong at least in the near term, the containership market is likely to gain in strength. Dividend Uncertainty a Bane: The coronavirus-triggered economic mayhem dented the financial stability of many companies and shipping companies are no exception. With international trade taking a beating, demand for goods declined, causing immense damage to the shipping companies. Due to this bleak demand scenario, many shipping companies resorted to dividend cut or deferral of dividend payments. For example, management at DHT Holdings ( DHT Quick Quote DHT - Free Report) announced a 75% cut in its quarterly dividend to 5 cents per share during February. Similarly, management of another shipping company Frontline Limited ( FRO Quick Quote FRO - Free Report) suspended dividend payments in third-quarter 2020 and has not yet resumed the same ever since. With investors preferring an income-generating stock, such unpredictability regarding dividend payments certainly does not bode well. Softness in Crude Tanker Market a Worry: Coronavirus-borne disturbances dimmed the prospects of the crude Tanker Market, which is being laid low by excess capacity. Due to this demand-deflation, spot rates of very large crude carriers or VLCCs are on the decline. Moreover, despite the recent uptick, oil demand is unlikely to return to the 2019 levels before 2022. Drab prospects pertaining to oil trade diminished the outlook for this market. Zacks Industry Rank Indicates Cloudy Prospects
The Zacks Transportation - Shipping industry is a 44-stock group within the broader Zacks
Transportation sector. The industry currently carries a Zacks Industry Rank #161, which places it in the bottom 37% of 250 plus Zacks industries.
Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates tepid 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 2021 has moved 36.1% south year over year. Before we present a few stocks that you may want to add or retain in your portfolio, 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 surged 43.4% compared with the broader sector’s increase of 67.6%. Also, the S&P 500 has appreciated 52.8% in the same time frame.
One-Year Price Performance
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 6.56X compared with the S&P 500’s 18.51X. It is also below the sector’s trailing-12-month EV/EBITDA of 19.22X.
Over the past five years, the industry has traded as high as 13.88X, as low as 4.56X and at the median of 9.60X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Transportation – Shipping Stocks to Keep Tabs on Danaos Corporation: This Athens, Greece-based company is benefiting from an expanded fleet and higher charter rates. We are also impressed by its efforts to reduce the debt levels.
Despite the challenges dragging the shipping industry, Danaos clearly stood its ground as is evident from the stock’s significant jump of more than 100% over the past six months. The stock, currently carrying a Zacks Rank #2 (Buy), has seen the Zacks Consensus Estimate for current-year earnings being revised more than 100% upward over the past 90 days.
You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Price and Consensus: DAC Global Ship Lease, currently carrying a Zacks Rank of 2, is based in London. Shares of the company have appreciated 79% over the past six months. Moreover, the stock is benefitting from the optimism surrounding the containership market. It has also seen the Zacks Consensus Estimate for current-year earnings being revised 27.3% upward over the past 90 days.
Price and Consensus: GSL Costamare: We are impressed by this Monaco-based company’s strong cash flow generating ability. Its capacity to reward its shareholders through dividend payments even in these turbulent times is a positive too. Further, the company’s young fleet size is praiseworthy.
Shares of the company have soared more than 47% over the past six months. The stock, currently carrying a Zacks Rank #3 (Hold), has also seen the Zacks Consensus Estimate for current-year earnings move 39% north over the past 90 days.
Price and Consensus: CMRE