Are Shipping Stocks Worth Investing In?
By TOI Desk Report January 3, 2024 Update on : January 3, 2024
The shipping industry went through tough times during the Great Recession. While it briefly recovered in 2010-2015, overcapacity became a huge problem that almost pulverized the industry. And as it was about to complete its recovery, the pandemic came and became another hurdle.
Global leaders had to impose restrictions and border closures immediately. These disrupted the flow of goods and supply chains across all regions. The companies within the industry had a massive revenue drop, forcing them to limit their production level to prevent further cash burns temporarily.
Shipping companies had to deal with slow port reopening for the next two years. But as restrictions eased, their capacity started to bounce back. This matched with the pent-up demand across industries.
However, the Russo-Ukrainian War exacerbated inflationary headwinds that hurt non-discretionary spending. In 2022, retail gasoline prices reached $5.006 per gallon, the highest in over 30 years.
This year, the shipping industry still faces several challenges.
First, the OPEC oil supply remains limited, causing worries about a potential surge in oil prices after winter. Second, tensions in the Middle East and Eastern Europe affect oil prices and supply. Third, the wars still threaten the movement of goods, particularly in the Black Sea and Mediterranean Sea. To that end, businesses and policymakers must be ready for potential delays and rerouting.
On a lighter note, the shipping industry shows resilience despite being highly cyclical. Global inflation has decelerated, and the interest rate hike pause continues. Also, most countries have maintained adequate stockpiles of basic commodities, including oil and gasoline. While energy price uncertainties persist, we must note that gasoline prices have already decreased by 40 percent. Given this, the shipping industry has enough time and energy reserves to cushion the blow of OPEC oil cuts.
Analysts have brought attention to this previously unnoticed industry amid global economic slowdown woes as valuations declined.
As we await the post-pandemic demand surge, shipping stocks are becoming more attractive to investors. Although shipping stocks remain battered, you can contemplate their potential for a rebound and long-term returns. Investors eyeing shipping stocks should concentrate on those with a proven competitive advantage amid the still challenging market environment.
This article will tackle why investing in shipping stocks is worth it and list our top picks.
Why invest in shipping stocks?
Investing in the shipping industry can be one of investors’ smartest decisions. The stabilizing inflation and interest rates will eventually pave the way for the global economic recovery.
Given this, more households will join the global consumer base, which may expand in the following years. The shipping industry is poised to bounce back and meet several challenges with the movement of goods. Ships transport about 90 percent of goods, with dry bulk vessels playing a central role.
Anticipate a stabilization of global freight volumes in the coming years, with the industry overcoming present challenges by 2025. Once the global economy fully recovers, freight volumes will pick up as demand rebounds. Shipping industry consolidation may also help reduce predatory pricing over time.
With that, the viability of shipping stocks may increase.
The good thing about shipping companies is their flexibility, given different economic conditions. Once the vessel is already sailing in oceans, it can avoid the crisis in the origin country. Other companies, like factories and oil drillers, are not movable, especially during a long-term problem. Hence, ships, especially dry bulk carriers, present an excellent opportunity for investors.
Moreover, shipping stocks are perfect for long-term investments due to their long service life. On average, a cargo ship can sail and earn money for about 30 years.
Of course, companies constantly launch new ships to keep or increase their productivity and efficiency. This strategy is more evident in used ships since purchases pay for themselves after a while. Charter proceeds often exceed the purchase price after a year or two. As such, companies are starting to realize a return on investment.
How Long-Term Investments Work In The Shipping Industry
Shipping stocks are excellent long-term investments. Historically, the industry had average annual returns of 5-10 percent. So, long-term investment returns had doubled. However, risks are higher due to their highly cyclical nature. Macroeconomic conditions deeply tie them, making them vulnerable to sudden changes, such as the restrictions in 2020.
On a lighter note, most shipowners or companies hold a substantial portion of stocks. As such, they have a vital interest in income and are more concerned about the performance of every vessel. They have also been active in the industry for a long time so that they can evaluate risks and opportunities.
As a long-term investment, shipping companies can come in the form of direct investments, such as stock purchases. Investors can also do crowdfunding or crowd investment, so even a tiny amount can be invested, and no extra or hidden fees arise.
Investors invest in ships that realize income through transport orders. These are distributed regularly by shipping companies or at the end of the agreed-upon timeframe.
Both the required volume and payment terms are fixed. Also, there are distinctions between repayment at the end of the time frame, usually up to 25 years, or a periodic distribution. This aspect makes it comparable to insurance and annuity. Hence, long-term crowd investment in the shipping industry has a flexible element to make financial planning easier.
However, investors must note that there is no claim to fixed interest rates. Also, an investment sale is not always secure.
The upfront tonnage tax is the primary benefit, ensuring that earnings are taxed at less than 1%, even though income from business operations is taxed individually. This move grants shipping companies registered in the tonnage tax system direct participation and significant tax advantages.
As the economy continues to normalize, growth prospects for 2024 are rosy. They have the potential to exceed market consensus and generate more earnings. The great thing about this pecking order is its impeccable liquidity, which shows a high capacity to sustain potential expansion and investor returns.
Safe Bulkers, Inc. (SB)
Safe Bulkers, Inc. (SB) is one of the leading dry bulk carriers or vessels globally. It also had a fair share of challenging times, especially in 2015, when overcapacity almost pulverized the industry. Its business operations remain hammered as it has yet to recover from the extreme changes in 2022 and 2023.
This is evident in its performance in the past year. Its 3Q23 operating revenue had a 31 percent YoY decrease. On a lighter note, changes in COGS and SG&A remained manageable, showing SB’s efficiency amidst inflationary headwinds. It allowed the company to stay profitable, given its operating margin of 27 percent. And now that Mainland China has reopened, it will be easier for dry bulk carriers to rebound.
In addition, SB maintains decent liquidity levels with its Net Debt/EBITDA Ratio of 2.4x. This aspect is crucial since SB is a capital-intensive company. Its ratio shows adequate earnings to cover all its borrowings in less than three years.
More specifically, its cash reserves of $74.06M are more than enough to cover all its current liabilities of $51.18M. Indeed, the company is very liquid to sustain its operations and launch new vessels without increasing its financial leverage.
Regarding the target price, we used the DCF Model for better precision. The derived value is $5.03, 28% higher than the current price. The potential rebound in its core operations may support the upside potential.
Also, it sustains dividend payouts, leading to an attractive dividend yield of 5.10%, much higher than the S&P 500 (SPX) average of 1.55%. Also, the owners hold a substantial portion of the total shares, so they are more transparent and concerned about the company. Even better, it announced a share repurchase program, which can raise the value of its shares.
Tidewater, Inc. (TDW)
Tidewater, Inc. (TDW) is a shipping company that provides offshore support vessels to the offshore energy industry worldwide. It supports natural gas and crude oil exploration, field development, and wind farm development.
With that, it plays an integral role in maintaining the stability of various global energies trading. Tidewater experiences tight competition, but the hot OSV market outweighs the current supply and number of service providers. It sees a vast room for improvement and expansion. Its solid 3Q23 performance can attest to the exciting market condition.
In its most recent report, the operating revenue rose 54% from the same quarter in 2022. Its sustained expansion primarily drove it amid the skyrocketing market demand.
The sharp YoY increase was most evident in the European and Mediterranean region at 96%, the Americas at 80%, and the Asia Pacific at 62%. Meanwhile, the West Africa and Middle East fleet revenues increased by 31% and 11%, respectively.
Furthermore, TDW increased its operating margin from 12% to 19% by keeping operating costs and expenses below the desired level, demonstrating improved efficiency and viability.
It maintains high liquidity with its Net Debt/EBITDA Ratio of 1.72x. Given this, TDW has enough core earnings to pay the net borrowings in less than two years. Investors should also be confident about TDW since its cash comprises 14% of the total assets, which is crucial for capital-intensive companies.
Cash can also cover the primary components of current liabilities, such as current borrowings, accounts payable, current tax payable, and accrued expenses.
TDW also has a decent valuation as it trades at about 5.7x the consensus forward 2024 EBITDA of $641 million. For 2025, the valuation is much better at about 5.1x the estimated EBITDA of $750 million. Concerning the DCF Model, the target price reaches $84.54, a potential upside of 24% from the current stock price.
The hot OSV market demand and the still tight supply may support the optimistic outlook. Offshore drilling is the best way to play the energy sector today, and TDW is leading the way. Although it is much costlier than onshore drilling, offshore wells are long-lasting with slow decline rates, making them excellent choices for long-term investments.
Also, moderate oil price changes do not necessarily impact the OSV market. Today’s oil prices are more stable than in 2022 as the world adjusts to the Russo-Ukrainian War and the disruptive OPEC oil supply cuts. Hence, TDW is an excellent stock for a buy position.
Tsakos Energy Navigation Limited (TNP)
Tsakos Energy Navigation Limited (TNP) is an oil tanker providing seaborne petroleum products and transportation services worldwide. It offers marine transportation services for oil refiners and companies under medium, long, and short-term charters.
Oil tankers enjoy a red-hot tanker market, driven by the increasing demand. As such, Tsakos leverages it by increasing the number of its fleets. It has recently purchased eight new-generation vessels after selling its eight first-generation ships. At the end of 3Q23, it had already received two LNG-powered Aframax tankers. It immediately began operations to cater to more clients.
Its core operations showed an 18% YoY decrease in revenue, which could be attributed to its lower operating capacity after selling its eight first-generation vessels. Despite this, TNP remained efficient, keeping costs and expenses proportionate to the revenue changes. Their combined amount was 16% lower than in 3Q22. Hence, the operating margin remained high at 28% versus 30% in the same quarter in 2022.
Moreover, TNP keeps adequate liquidity levels with its Net Debt/EBITDA Ratio of 2.24x. It is essential to note this since it had recently ordered eight new vessels and received two of them. It has no current liabilities, and none of its borrowings will mature within the year. This aspect makes TNP a secure company with the capacity to sustain dividend payments.
But what sets TNP apart from many of its peers is its preferred dividends. Relative to the stock price, dividends are attractive, with a yield of 8.9%. It is much higher than the ordinary dividends, with yields of 2.70%.
Even so, both are much more attractive than the SPX average dividend yield of 1.55%. Its high cash levels and zero current liabilities allow it to cover preferred dividends. Hence, investors generate returns at a reasonable price.
The shipping industry is a vast market with many carriers shipping various goods and services globally. Not all markets, like dry bulk, benefit from the current macroeconomic conditions, but their rebound potential is high. Other markets enjoy solid topline growth and are poised to expand further as the global economy recovers. This makes a lot of shipping stocks excellent investment picks.