Shipping Companies: The Heart of Supply Chain Disruptions

This week, we use AAII’s A+ Investor Stock Grades to provide insight into three shipping stocks that are at the root of supply chain disruptions. For investors focused on opportunities in this industry, should you consider the three shipping stocks of Genco Shipping & Trading Ltd., Matson Inc. and Star Bulk Carriers Corp.?

Shipping Stocks Recent News

In recent months, people all over the world and certainly in the U.S. have felt the shock of supply chain disruptions. Economists and business leaders are forecasting that shipping backups at large U.S. ports — and the resulting goods shortages and price surges — will likely not be resolved until well into 2022. For example, Goldman Sachs has noted that some 77 ships carrying $24 billion worth of goods are waiting outside docks in Los Angeles and Long Beach, California. In September, about one third of containers sat longer than five days before being shipped out, and the number of offloaded containers dropped by 9.1% and 3.6% in Long Beach and Los Angeles, respectively.

President Biden has ordered ports to stay open 24 hours to alleviate the problem, however, this has only helped at the margins. Shipping a container through major U.S. ports currently takes triple the time it normally would. Additionally, ongoing labor shortages and lack of coordination among players in the U.S. supply chain restrained the effect of the president’s order.

These pressures are being felt in the economy, putting constraints on every industry from grocery stores to big manufacturers. Prices for consumer and wholesale goods have greatly increased and are expected to create an inflationary holiday season. Federal Reserve chairman Jerome Powell said last Friday that inflation has lasted longer than he expected and likely will persist into next year, but added that it has not risen to a level that warrants substantial policy tightening. In the meantime, consumers will pay more and have access to less.

Economist Ronnie Walker of Goldman Sachs noted, “Backlogs and elevated shipping costs are likely to persist at least through the middle of next year because no immediate solution for the underlying supply-demand imbalance at U.S. ports is available.” He continued, “Relief could arrive eventually. The pressures should soon begin to ease, but only slightly as we pass the ongoing seasonal peak in shipping demand ahead of the holiday season.”

Amid these disruptions, firms have been forced to find ways to keep their products moving. This issue has been frequently cited in third-quarter 2021 earnings reports as one of the reasons for lowered revenue estimates. “This is a great problem to have, but it increases the demands on our supply chain at a time when the industry is navigating labor shortages, material supply issues, transportation cost and congestion challenges,” said packaged food company Conagra CEO Sean Connolly.

Ultimately, the problems faced by companies and consumers stem from issues related to the coronavirus pandemic. The U.S. has previously depended upon a “just-in-time” supply chain that was not prepared for massive demand shifts. These issues will persist for the foreseeable future, and firms will have to navigate this difficult time to remain competitive. Amid the global supply chain disruptions, surging freight costs, growing global trade and container shortages, shipping companies may offer attractive opportunities.

Grading Shipping Stocks With AAII’s A+ Stock Grades

When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.

Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three shipping stocks — Genco, Matson and Star Bulk Carriers — based on their fundamentals.

AAII’s A+ Stock Grade Summary for Three Shipping Stocks

What the A+ Stock Grades Reveal

Genco Shipping & Trading Ltd. (GNK) is an international shipping company specializing in the transportation of iron ore, coal, grain, steel products and other core commodities. It is involved in the ocean transportation of dry-bulk cargoes. The company operates in one segment: the ocean transportation of dry-bulk cargoes worldwide through the ownership and operation of dry-bulk carrier vessels. The company’s fleet consisted of 40 dry-bulk vessels, including 17 Capesize dry-bulk carriers, nine Ultramax dry-bulk carriers and 14 Supramax dry-bulk carriers, with an aggregate carrying capacity of approximately 4,368,800 deadweight tons. It generates revenue through time charter agreements, spot market voyage charters, pool agreements and spot market-related time charters.

Earnings estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. The company has an Earnings Estimate Revisions Grade of C, which is considered neutral. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.

The company reported a slight positive earnings surprise last quarter of 0.5%, and two quarters ago reported an earnings surprise of 200%. Over the last month, the consensus earnings estimate for the third quarter has increased from $1.406 to $1.41 per share based on three upward revisions. Three months ago, the consensus earnings estimate was $0.759 per share.

A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.

Genco has an A+ Growth Grade of A. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow. The company reported second-quarter revenues of $121 million, up 63.1% from $74.2 million in the year-ago quarter. The company reported quarterly diluted earnings per share of $0.75. Genco has a 2.3% dividend yield.

Genco has a Momentum Grade of A, based on its Momentum Score of 82.

Matson Inc. (MATX) is engaged in providing ocean transportation and logistics services. The business segments of the company are ocean transportation that provides ocean freight transportation services to the domestic non-contiguous economies of Hawaii, Alaska, California, Okinawa and different islands in the South Pacific, and logistics for long haul and regional highway trucking services, warehousing and distribution services, supply chain management and freight forwarding services. The business of these segments is conducted through the firm’s subsidiaries: Matson Navigation Company Inc. (MatNav) and Matson Logistics Inc. The firm generates the majority of its revenue from ocean transportation.

Matson has a Quality Grade of A. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.

The company ranks strongly in terms of its return on assets (ROA) and F-Score, ranking in the 91st and 94th percentile of all U.S.-listed stocks, respectively. However, it ranks poorly in terms of its ratio of accruals to assets, putting it in the 48th percentile.

Matson has a Momentum Grade of B, based on its Momentum Score of 64, and a strong Growth Grade of B. The company has a 1.4% dividend yield.

Star Bulk Carriers Corp. (SBLK) is a Greece-based shipping company that provides seaborne transportation solutions in the dry-bulk sector. The company owns and operates dry-bulk carrier vessels, which are used to transport major bulks, such as iron ore, coal, grains, bauxite, fertilizers and steel products. It owns a fleet of vessels that consists of Newcastlemax, Capesize, Post Panamax, Kamsarmax, Panamax and Supramax that carry a total capacity of more than 12 million deadweight tons. Star Bulk Carriers’ Capesize vessels primarily transport minerals from the Americas and Australia to East Asia, particularly China, but also to Japan, South Korea, Taiwan, Indonesia and Malaysia.

The primary driver of growth for the company is rising shipping costs. Given the surge in the Baltic Exchange Dry Index, which measures the cost to ship commodities across various routes, Star Bulk Carriers can potentially earn $41,000 per day, versus about $15,000 per day one year ago.

Star Bulk Carriers has a Value Grade of A, based on its Value Score of 12, which is considered to be deep value. The company’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 32 for the price-to-free-cash-flow ratio, 6 for shareholder yield and 22 for the price-to-book ratio (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.

The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-earnings, price-to-sales and enterprise-value-to-EBITDA ratios.

Star Bulk Carriers has a Momentum Grade of A, based on its Momentum Score of 88. This means that it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters.

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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.

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