Occasionally, I look deep into the bargain bin to find a discounted stock that has a great risk/reward tradeoff. In my research, I stumbled upon StealthGas (GASS), a $199 million small-cap shipper of liquid petroleum gas (LPG). With the propane-fueled barbecuing season upon us, StealthGas jumped out at me for its deep undervaluation and high growth potential. In addition to propane, the company also transports butane, butadiene, isopropane, propylene, crude oil, vinyl chloride monomer, gasoline, diesel, fuel oil, and jet fuel, chemicals, and edible oils. The company looks compelling as a multi-year long-term investment.
StealthGas currently owns 33 LPG carriers, 3 product tankers, and one Aframax crude oil tanker. The company is ranked number one worldwide in owned vessels in the 3,000 to 8,000 cubic meters (CBM) LPG carrier segment. The average age of the fleet is 11.1 years and the carrying capacity is 161,822 cbm.
The primary reason that the company is undervalued is due to European debt fears. StealthGas is based in Greece, so the fears of a Greece default have weighed on the stock. The company was trading in the mid-teens before the 2008 financial crisis. The stock then fell to the single-digits during and after the financial crisis. The problems in Europe have kept the stock down for the past few years. The stock made a nice recovery in 2012, but recently dropped from about $12 to $9 in the past few months.
Another reason for the recent descent in stock price was the company's recent share offering of 11.5 million shares. This diluted the amount of outstanding shares, thus contributing to a lower stock price.
StealthGas now trades at only 59% of its book value per share of $16.64. The company also has a trailing P/E ratio of 6.88 and a forward P/E ratio of 6.30. This represents a great starting point from an investment viewpoint. As worries about the Eurozone fade and the company's fundamentals improve, the stock should rise to reach its book value per share. Reaching the book value per share may take a few years, so I see this opportunity as a long-term investment looking out at least three to five years into the future.
Growing LPG Shipping Sector
One key factor that indicates future growth for StealthGas is the steady growth in the LPG shipping sector. Seaborne trade in LPG and petrochemicals has a 10 year compound annual growth rate of 4.5%. The key drivers for this growth include:
- GDP growth in emerging economies
- Growth in demand for LNG creates a by-product that needs to be shipped because it's too expensive to store.
- Increasing distance between feedstock supplies, LPG production and end-users
- U.S. shale gas driving increased trade volumes.
The U.S. shale gas industry is considered a game changer for LPG transportation for a number of reasons. The surging gas production in the U.S. has made this the least expensive market in the world. LPG needs to be shipped due to limited domestic demand, high storage costs, and the Kyoto Protocol's prohibition of gas flaring. U.S. LPG exports are expected to triple by 2016 to 12.1mm tons. In 2012 the U.S. Coast Guard began allowing pressurized ships to load propane in the U.S., which will facilitate export growth. Since 2009, the U.S. has switched from a net importer of LPG to a net exporter. All of this provides important catalysts for the increased use of StealthGas' ships.
Another important factor for StealthGas is the fact that the limited LPG fleet growth has led to greater charter rate stability. The LPG segment remains smaller than the other shipping segments with a negative fleet growth currently projected from 2013 onward. Over 20% of the 3,000 to 8,000 cbm fleet is 20+ years old. Only 15 ships in the 3,000 to 8,000 cbm size are on order for delivery over the next three years. The small orderbook and strong dynamics support stable charter rates.
Balance Sheet/Cash Flow
The company ended the first quarter with $52 million in total cash and $300 million in total debt. For 2012, the operating cash flow was $48 million. This was an increase over $42 million in 2011 and $28 million in 2010. The new catalysts for the company should help improve upon these figures going forward.
The continued exposure to Greece is a risk-factor for StealthGas. However, the European Union has implemented a debt restructuring plan for Greece. This plan, known as the Private Sector Involvement, wrote-off $100 billion of debt. The European Union remains committed to avoiding a default. Nevertheless, the company's exposure to Greece remains on the backburner for the company.
Earnings Growth Expectations
StealthGas is expected to grow earnings at 4.2% this year and 25% next year. This puts a tangible number on the catalysts mentioned above for the company. The six analysts covering the company have an average one-year price target of $13.90. This represents a 43% increase over the current price of $9.70. I think that this is a realistic price target due to the current deep undervaluation and positive conditions facing the company.