Frontline's a Buy Heading into Earnings

The dry bulk shipping industry is off to the races and it is time to take a ride. These high beta stocks move all over the place based on shipping rates and fueled by demand in Asia. Many also have beautiful dividends. If you don't mind taking motion sickness pills, this group can be highly rewarding.

Frontline (FRO) is a stock I first started watching about three years ago. It seems as though this sector has gone through quite a change due to increased demand overseas for metals and agricultural products. As of the news yesterday I have gotten very bullish on those that operate oil tankers. On May 19th, Dahlman Rose analyst Omar Notka said rates for very large crude carriers headed towards the United States were higher last week than those heading eastward, which were at six months highs already. West African rates for VLCC and Suezmax vessels were also at year-to-date highs.

I still believe the dry bulk shippers have growth going forward, but the oil shippers are especially going to continue their run based on increased need and a lack of vessels for this service. FRO had exceptional growth last year and should continue this going forward. In 2006 their net income was $516 million; the total for 2007 was $574 million. With respect to earnings, 2006 saw EPS of $6.90 and a rise to $7.67 in 2007. Their dividend per share in 2006 was $7.55 while 2007's yield was $11.04.

As of the last year, including new builds, FRO has 74 vessels. They have 39 VLLC double hulls, 19 Suezmax double hulls, 7 VLLC single skin/double skin, 8 OBO and one Suezmax double skin. This is important as there is an upcoming deadline with respect to single hull use. Frontline is already positioned for this transition.

Current factors for demand of ships and increasing day rates seem to be steady going forward. World economic growth is intact. Oil demand seems to be steady. The price of oil should stay high going forward with respect to old levels. Finally, supply disruptions and political events will always be here to cause problems with oil production. Also, China becoming a big player will also increase demand. Current GDP data for this year with the source being IMF/IEA shows 2008 to have under 2% growth estimated for Europe and the United States, while China looks to be around 10%. World oil demand growth looks to be steady at about 2% until 2012. The IEA also shows that world production of oil has increased since August of 2007. This increase was almost 3 million barrels a day through January of this year.

Going forward Frontline has the ability to build new ships on long term financing as the Company has a great balance sheet. Other companies will have some difficulty doing this. They should be able to command higher day rates going forward and this should continue for some time. The stock has a very bullish chart and has seen higher highs repeatedly since the beginning of the year. I believe this stock is still cheap based on its PE valuation of just over 8. I also think that this stock could produce a special dividend that could really make its price pop. Buy this stock into earnings.

Disclosure: None

Comments

[Archman Inv...:]

Michael:

That was a well written, thought out article, full of facts and explanations.

But where were you 80% ago on FRO? 60% ago on all the bulk shippers?

The time to buy is when nobody wants them, and nobody talks about them. Your logic still applied when they were getting killed a few months ago. That was the time to but them. I have owned FRO in the past. If oil prices correct, which I am sure they will, FRO is going to get killed, just because people associate oil tankers with oil itself.

Again, good article. For the un-informed investor (or gambler, etc) this article would have been much more more helpful about 4 months ago.

I have no positions, either long or short, in any stocks you mentioned.

2008 May 20 07:19 AM

[Archman Inv...:]

One follow up to my post-

I said that:
"if oil prices correct, which I am sure they will, FRO will get killed."

I should have added that I am a long term bull on oil, energy, supply and demand, and that any oil "correction" though steep/ shallow, will only be a rest stop on the way to much higher prices for oil, and even more so, higher stock prices for FRO.

2008 May 20 07:25 AM

[Matt Schuering:]

Interesting article on an interesting company. I have owned this stock in the past and was happy with its overall performance over the time I owned it, although it was quite depressed for some time. But I must agree with the previous comment that I think this stock has had its day in the sun. When the stock was $30 cheaper would have been a great time to have recommended it. The fundamentals of the company were no different then. Also, this company has no long-term contracts for shipping so they are truly at the mercy of the daily shipping rates, and once these drop, which could happen for a number of reasons, there is nothing FRO can do but see their stock price drop along with it. And although they have paid great dividends and the current tax treatment makes this a great play, I am concerned about dividend taxes in the future, this will definitely hurt the after-tax yield of this high paying stocks. And if they declare the special dividend, and the stock "pops" like you say, the market will take the special dividend right out of the stock price once it goes ex div. This is not the right reason to purchase this stock. Also, they have enjoyed nice operating income, but look at quarter over quarter numbers and see how much of this operating income came from a gain on the sale of assets. I liked it at $31 but at $65 it is too high for me to get back in. If I were long I would be thinking about taking some money off the table.

2008 May 20 07:57 AM

[ADK:]

I agree with the article in that FRO is a buy. Looking back, the stock looked good at $30, but with the dividend yield its current price is still a bargain. This sector has some bull months ahead and the dividend should pay for the time to otherwise wait for a pullback to $30 (maybe one can wait till high 50's, but with earnings and dividend coming soon I'd be a buyer now). Remember that AAPL was a buy at $5 and again at $120, and that had no dividend.

2008 May 20 08:11 AM

[User 176539:]

This is a great article. FRO has many long term contracts that will carry for many of years to come. The dividends and special dividends will pay for the stock itself in the long run, mine has in the past 4 years. Any day of the year is the right day to buy Frontline LTD.

2008 May 20 08:43 AM

[Tim Plaehn:]

A conservative way to play FRO is SFL. Ship Finance was spun off by FRO a few years ago and has first call on the revenues of many of FRO's ships plus a portion of the profits. Steady dividends are the plus vs. the fluctuation of FROs payouts.

2008 May 20 09:10 AM

[Boubou:]

Funny how no gurus loved FRO until its recent record run. Analysts had nothing good to say over the years I have owne this stock and yet wether you just collect the dividends, trade the peak and troughs, or both, it has been a geat stock to own.
Once the gurus start shouting, its usually a good time to sell out.

2008 May 20 09:33 AM

[ChrisCombs:]

It is still a buy if $100 per share is doable this year?

2008 May 20 09:36 AM

[notsosmart:]

what a laugh. ihave no connection to this stock.that said i bought at $29.00 because i figured nobody has figured out a way to pave over the ocean. the dividends have almost paid for the stock.when i emailed management to thank them for the good job i got a reply from the ceo. see if you can get that from a u.s. co.i could sell for a good profit but i will hold for the dividends.all those pundits & gurus who downplayed it all these months put a big smile on my face.

2008 May 20 11:07 AM

[bryanz:]

FROs had a great run over the last month or so... the continued Cramer calls probably aren't hurting although I wonder if has as much sway as he used to? I also own NAT which has been doing pretty well. The oil shippers seem like a strong intermediate term play, especially with the divs. I'm a little nervous about FRO going into earnings b/c of the runup its already had, but NAT's CEO has already come out saying he expects the Q2 div to be higher than the Q1 div, which was a 136% increase over the Q4 of 2007...

2008 May 20 04:09 PM

[golds:]

If you are buying less than $250,000 worth or are willing to hold shares until Sept/Oct then save some money and buy TNK instead. FRO is maxed out.

For more information see:

seekingalpha.com/mb/to...

2008 May 20 05:41 PM

[legmaker:]

Thanks for the comments everyone. I know we can sit here and hammer each other over whether you can buy it here, or short it. My argument is that day rates are still headed upward. Will they be down later, maybe, but that is for you to decide. As for me, I buy it here, and get out before the fundamentals of pricing breakdown. As for where I was when this took off, Potash. Have a great day everyone, there are plenty of stocks out there, you dont have to own them all for over a year.

2008 May 20 06:41 PM

[whisperonth...:]

If the price of oil goes down, more buyers will mean more work for the tankers... I'm glad I'm in. I may have to look at a couple others, just to see what I'm missing!

2008 May 20 09:48 PM

[whisperonth...:]

TNK isn't bad, but FRO has experience. I'll watch TNK, maybe get in a bit later. It will either go or not go...

2008 May 20 09:50 PM

[tireman63:]

That old fox Boone Pickens seems to think that oil is headed to $150, and the oddsmakers in London think so, too. Remember, the race is not always to the swift, nor the battle to the strong---but that's the way. to bet.

2008 May 21 11:39 AM

[RADMOK:]

i respectfully disagree with your article and reccomendation. Trading at 14 imes book and geneorus trailing PE of 12.. FRO is not only a SELL it is a perfect SHORT. It may see a pop from novice retail buyers.. but fair value on FRO is around 35.. or 50% off from here.
I would swap into DRYS / EXM / TBSI / OMG OMG is a steal here trading at Book value plus one year's EPS....

2008 May 22 06:24 AM

[legmaker:]

RADMOK, Thank you for your very respectful disent on my evaluation. I always appreciate it when someone has a different opinion on my approximations. I do like your idea as it is a very risky play at these levels. have a great day.

2008 May 22 08:51 AM

[Af FRO:]

it worked the last time it had an irregular div. I think the cos. structure dictates it must pay out certain excess cash, but that may have been a different co.

2008 May 24 06:25 PM

[Af FRO:]

Anyone watching? Beat the market today I would say. (Dow down 300 gazillion pts.) American dollars not enough for international costs? What will next week bring???

2008 Jun 06 08:48 PM

[herbert68104:]

The lesson that I have learned the hard way is " Always stay friends with John Fredrikson" he knows shipping.

2008 Jun 24 07:53 PM

[Af FRO:]

who the heck is John Fredrikson

you'all should a listened to me. I made $500 on a couple option contracts July65 on FRO.

all done, ta ta you phonies

2008 Jun 26 12:55 AM

[Af FRO:]

I said ta ta, and you shoulda listened

2008 Jul 08 02:40 AM

[Chickenpookie:]

Ouch! I lost a bundle on that call, and never got a sell signal or a kiss. Waiting for $70 to buy again!

2008 Nov 03 07:15 PM