* All data are as of the close of Monday, April 6, 2015. Emphasis is on company fundamentals and financial data rather than on commentary.
So, investors, what floats your boat? Are there any great finds you have added to your portfolio lately? What about some boats themselves? Or more accurately, some shipping companies?
We'll need to tread these waters carefully, though, since the North American shipping industry is highly dependent on oil and gas production in addition to the normal container-loads of consumer goods and other raw materials. In fact, of the six largest North American shipping companies, five are either totally or partly specialized in the shipping of crude oil, natural gas and other energy products.
While some of these companies are expected to grow their earnings rather robustly over the near term, investors need to be highly selective, as their largest customers within the oil and gas industry are still operating under tough constraints.
Having already compared North America's 3 Largest Shipping Companies, Kirby Corporation (NYSE: KEX), Teekay Corporation (NYSE: TK), and Golar LNG Ltd. (NASDAQ: GLNG), we'll now look at the next 3 largest North American companies in the industry: Teekay LNG Partners LP (NYSE: TGP), Teekay Offshore Partners LP (NYSE: TOO), and Matson Inc. (NYSE: MATX).
• Teekay LNG Partners LP, founded in 2004 and headquartered in Hamilton, Bermuda, provides marine transportation services for liquefied natural gas (NYSEMKT:LNG), liquefied petroleum gas (NYSE:LPG), crude oil, propane, butane, ethane, ethylene, propylene, butadiene, and ammonia, with its fleet of 34 LNG carriers, 32 LPG/multigas carriers, and 9 conventional tankers. This 4th largest North American company in the Shipping industry is a subsidiary of the 2nd largest Teekay Corporation.
• Teekay Offshore Partners LP, founded in 2006 and headquartered in Hamilton, Bermuda, provides marine transportation, oil production, storage, towage, and floating accommodation services to the offshore oil industry in Europe's North Sea and South America's Brazil. The company has a fleet of 32 shuttle tankers, 7 FPSO units, 6 FSO units, 1 hiload dynamic positioning unit, 10 long-haul towing and anchor handling vessels, 3 units for maintenance and safety, and 4 conventional oil tankers. This 5th largest North American company in the Shipping industry is also subsidiary of the 2nd largest Teekay Corporation.
• Matson Inc, founded in 1882 and is headquartered in Honolulu, Hawaii, is an ocean freight carrier in the Pacific, offering ocean transportation services to the islands of Hawaii, Guam, and Micronesia, expedited services from China to Long Beach, California, and ocean services to New Zealand, Fiji, Samoa, American Samoa, Tonga, the Cook Islands, Australia, the Solomon Islands, and Nauru, using its fleet of 18 owned and 3 chartered vessels, which include 11 containerships, 3 combination container/roll-on/roll-off ships, 1 roll-on/roll-off barge, and 3 crane-equipped container barges. The company also provides container stevedoring, container equipment maintenance, and other terminal services on the islands of Oahu, Hawaii, Maui, and Kauai, in addition to providing freight forwarding, consolidation, customs brokerage, purchase order management, and non-vessel operating common carrier services.
Over the past 3.5 years since the correction of Q3 2011, all three of the largest North American companies in the Shipping industry have flourished as graphed below, mainly on the strong outflows of energy products. By the time crude oil reached its rent peak in the summer of 2014, KEX [orange], TK [yellow], and GLNG [gray] were all beating the S&P 500 index' 80% rise with gains ranging from 140% to 210%.
Meanwhile, our second trio of companies to be analyzed today all underperformed the broader market, with gains ranging from 40% to 50%. The underdogs were beat.
Yet over the past six months since the correction of Q3 2014, some bottom-fishing in the shipping space has lifted our underdogs above the big boys, as graphed below. Of the six companies, our three underdogs rank 1st, 2nd and 4th in stock performance.
We now have some viable choices among all six of these companies, with some of today's three underdogs offering just as much potential as their larger rivals, if not more. To differentiate among them we'll need to take a look at their future earnings growth.
For the Shipping industry as a whole, earnings growth is expected to put in one more great quarter before slumping quite severely going forward, as tabled below where green indicates outperformance while yellow denotes underperformance relative to the broader market.
During the current quarter, the industry's earnings are expected to outgrow the broader market's earnings growth at some 5.15 times its rate.
But that's it for the outperformance. After that it's downhill all the way, with slight underperformance next quarter and next year, and slightly more underperformance over the next five years. It seems the glut of energy products is going to slow the movement of new supply aboard our shippers.
Zooming-in a little closer, it seems our three underdogs still have some upward momentum remaining near term, while the longer term belongs to their larger peers, as tabled below.
Over the current and next quarters combined, 5th largest TOO is expected to lead its peers with a total of 3,628% earnings growth, followed by 6th largest MATX with 592% and 2nd largest TK with an almost equal 591% growth. The others aren't nearly as impressive, with a market underperformance by 4th largest TGP and earnings shrinkage by the largest KEX.
Next year, however, belongs completely to 3rd largest GLNG, which is expected to grow the most of the six.
Over the longer term, our three underdogs return to their dog houses, as they are simply not going to be any match for the three top dogs in as much as earnings growth is concerned, with 2nd largest TK beating all with 12% growth averaged annually over the next five years.
Hence, while two of today's underdogs are expected to provide great growth potential near term, these would likely be just short-duration trading opportunities that we might not want to hold over the long haul.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, MATX delivered the greatest trailing revenue and earnings growth year-over-year, while TGP and TOO delivered the least, which were negative denoting shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, TGP enjoyed the widest profit and operating margins, where TOO and MATX split the narrowest margins between them.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, MATX' management team delivered the greatest returns on assets and equity, where TGP's and TOO's teams split the smallest returns between them.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, TGP provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while TOO's DEPS over current stock price is lowest, even negative denoting loss.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, TOO's stock is the cheapest relative to forward earnings and 5-year PEG, TGP's is cheapest relative to company book value, while MATX' is the priciest relative to all three ratios.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, TGP offers the highest percentage of earnings over current stock price for the current quarter, TOO offers it next quarter and beyond, while MATX offers the smallest percentages in all time periods.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, TOO offers the greatest growth near term, MATX offers it next year and beyond, while TGP offers the slowest growth throughout.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe TOO's stock offers the greatest upside potential and least downside risk, while TGP's offers the least upside and greatest downside.
It must be noted, however, that TOO's stock is already trading below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, MATX is best recommended with 5 strong buys and 0 buy representing a combined 71.43% of its 7 analysts, followed by TOO with 1 strong buy and 2 buy ratings representing a combined 33.33% of its 9 analysts, and lastly by TGP with 0 strong buy and 1 buy recommendation representing 11.11% of its 9 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… TOO by a boatload, outperforming in 14 metrics and underperforming in 5 for a net score of +9, followed by MATX barely treading water, outperforming in 11 metrics and underperforming in 11 for a net score of 0, with TGP in desperate need of bailing, outperforming in 6 metrics and underperforming in 16 for a net score of -10.
Where the Shipping industry is expected to outperform the S&P broader market substantially this quarter, then underperform moderately next quarter, next year, and beyond, the next three North American companies in the space are expected to split perform in earnings growth near term - with 5th largest TOO and 6th largest MATX outgrowing the broader market as well as their three largest North American-based rivals, while 4th largest TGP grows the least. Over the longer term, however, all three underdogs are seen growing the least of all six companies.
After taking all company fundamentals of our three underdogs into consideration, 5th largest Teekay Offshore Partners LP delivers investors the finest financials, given its lowest stock price to forward earnings and 5-year PEG, highest EBITDA over market cap, highest future earnings over current stock price overall, highest future earnings growth near term, highest dividend yield, best price targets, and greatest buy recommendation percentage - decisively winning North America's Next 3 Shipping Companies competition.