Frontline Steers Well in Rough Waters

by Matt Weinschenk

The First “Turnaround Stock” to Buy When We Hit Bottom

It’s not the time to try to call a bottom… but it is time to plan for it.

Our favorite leading indicator of economic activity, the Baltic Dry Index, will likely be the first to signal the end of a recession. And it provides a convenient clue to one stock I believe will come back faster than most others, once the market-wide comeback is underway.

The Baltic Dry measures shipping costs, and therefore shipping activity, and is therefore a great “boots on the ground” measure of what’s going on in the world economy. When costs are up, it benefits shipping companies. My favorite right now is Frontline (NYSE: FRO).

Frontline focuses specifically on tanker ships for transporting oil. When economic activity picks up, so will oil prices and shipping rates. And that plays right into Frontline’s hands.

The oil focus means Frontline’s recent quarters haven’t been as bad as other shippers because of oil stored offshore to take advantage of the contango situation.

Overall, the company still posted growth for 2008, but last week’s quarterly numbers were certainly lackluster. Earnings per day on a “very large crude carrier” dropped to $61,500 from $96,500 a year earlier.

Still, Frontline management seems to be making the right moves in tough times. It’s proceeding with cautious investment in new capacity, switching some of its more profitable daily arrangements to more predictable long-term contracts.

Even so, the stock got hammered again Tuesday, down another 4% as of this writing.

But that puts the stock price at about two times trailing earnings. And with enough cash flow to cover interest costs, I’m sure Frontline can remain a going concern through the crisis.

When spending does pick up, those who buy Frontline at, or near, the market bottom will likely be the first to benefit.

Comments

[notsosmart:]

the dividends on this sock paid for all my holdings of this stock.

Mar 04 09:34 AM

[notsosmart:]

as i understand it the ceo of this co. gets no salary.only dividends. its worth buying near the bottom but where & when is that?all help appreciated re this.

Mar 04 09:44 AM

[Tim Plaehn:]

VLCCs now earning $40k per day. FRO has daily expenses of about $32k per day. Things will be tight for a few quarters. BDI for dry freight and tanker companies are really different animals and using one to justify the other show little understanding of the market.

Mar 04 10:22 AM

[ginger4778:]

My church owns this stock, and I begged our financial person to sell it when it was just over $28, which was only two or three weeks ago. I figured she could always buy back in after it tanked (no pun intended).

I do think we're seeing strong signs that parts of the globe--definitely China--have the end of their recessions in sight. But there's been more competition in tanker fees, decrease in OPEC production, etc., so I don't think FRO is at a bottom yet. However, it dropped so much so fast that surely it'll pop on any good news.

I'd be patient and start nibbling around $12. Buy in increments. Don't be surprised if it hits $10 or even $8.

Mar 04 10:33 AM

[whisperonth...:]

I like tanker stocks and they have given me more than enough in dividends, just from holding them, to cover my total gasoline costs for last year at least 4 times over. Even this year, one quarter's dividends covered me for a year, with the prices way below where the belong. These are in my buy and hold forever package.

Mar 04 02:49 PM

[notsosmart:]

thanx for the comments.

Mar 04 03:25 PM

[paythepipernow:]

I believe that Nordic Atlantic Tanker(NAT) is a much safer bet with no debt, an unused $500,000,000 line of credit and very low operating costs.

Mar 04 04:45 PM

[Alan Young:]

FRO is still trading at over 2x book value, when many shippers are trading at less than book, and its dividend yield is just a shadow of its former glory, and also below industry averages. I'm sure it will come out okay, but it's not my top pick in the shipping industry. Not even one of the top 10.

Mar 04 09:19 PM

[henarl:]

I'm still long 4000 shares of FRO that I paid $47/sh for so I am down about 120 grand on the share price but I have gotten about 80 grand in dividends and covered call options so it's not quite as bad as it could be. I will keep these shares and keep selling covered calls while waiting for FRO to turn around, which I believe it will.

Mar 05 04:59 PM

[Steve W fro...:]

"When spending does pick up, those who buy Frontline at, or near, the market bottom will likely be the first to benefit."

Gee, you think?

I LOVE comments like this. My other favorite is " You know Bob, the team that scores the most points is going to win this game!"

Mar 09 09:11 AM