The Zacks Transportation - Shipping industry is suffering from headwinds like high expenses and lingering supply-chain disruptions. Geopolitical and environmental woes represent further challenges.
Despite macroeconomic challenges causing uncertainty in demand, the industry demonstrates resilience, especially in case of companies prioritizing growth and operational efficiency. Among the companies in the industry that will probably survive the challenges are ZIM Integrated Shipping Services Ltd., Euroseas Ltd. and Seanergy Maritime Holdings.
Industry Overview
The companies belonging to the Zacks Transportation - Shipping industry, which is cyclical in nature, offer liquefied natural gas and crude oil marine transportation services under long-term, fixed-rate contracts with energy and utility bigwigs. Most participants focus on the seaborne transportation of crude oil and other oil products, globally.
The industry also includes players who own, operate and manage liquefied natural gas carriers. Some participants are owners and operators of containerships for charter. The change in the e-commerce landscape due to the coronavirus impact implies that shippers rely more on third-party logistics providers. The well-being of the industry participants is directly proportional to the health of the economy. The resumption of economic activities after coming to a standstill during COVID-19 bodes well for the industry.
5 Shipping Industry Trends in Focus
Supply-Chain Disruptions & High Costs: Although economic activities have picked up from the pandemic gloom, supply-chain disruptions continue to dent shipping stocks. Increased operating costs are also limiting bottom-line growth. Costs will likely continue to be steep going forward due to supply-chain troubles. High fuel costs push up the operating expenses of the industry players. Shipping costs are on the rise due to the Red Sea crisis.
Upbeat FLNG Market: The floating LNG or liquefied natural gas market is growing due to its economic viability and is expected to display significant capacity growth, particularly in Africa and North America. The global FLNG market, valued at $27.27 billion in 2023, is projected to reach $53.54 billion by 2032, growing at a CAGR of 10.8% in the 2024-2032 timeframe. Factors like low unit costs, standardized designs, and improving demand for quick-to-market LNG supply are driving growth.
Improving Capesize Market Sentiment: Factors like a build-up of iron ore inventories in China have resulted in higher Capesize freight rates. In fact, with the reopening of the Chinese economy, the entire shipping industry heaved a sigh of relief. Ocean shipping is hugely dependent on China. This is because China is not only a key manufacturing hub but also sees significant high demand for goods and services, courtesy of the country's large population. The favorable conditions in the dry bulk sector also bode well.
Environmental Woes: The shipping industry accounts for 3% of the world's greenhouse gas emissions, which have increased significantly in the last decade. Even though the International Maritime Organization aims to reduce greenhouse gas emissions from ships, full compliance requires significant investments in new technologies and cleaner fuels.
The industry's aim to reduce carbon emissions may suffer a setback as the current Red Sea crisis compels it to use more vessels and take longer routes to ensure the smooth sailing of global maritime trade. The longer travel times are increasing the total emissions from the fleet for the same amount of cargo. The disruption has raised doubts about the industry's ability to meet the IMO's mandate for a 20% reduction by 2030.
Geopolitical Woes: The shipping industry is responsible for transporting the majority of goods involved in world trade and is rightfully considered as the life line of the global economy. Geopolitical tensions between major trading nations are disrupting trade routes, bringing down goods transportation, and in turn hurting the industry players. For example, the attacks by Yemen's Houthi militants on vessels in the Red Sea have disrupted maritime trade.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Transportation - Shipping industry lies within the broader Zacks Transportation sector. The industry currently carries a Zacks Industry Rank #133, which places it in the bottom 47% of 250 plus Zacks industries.
The group's Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates murky near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group's earnings growth. Before we present a few stocks that you may want to add to your portfolio, let's look at the industry's recent stock-market performance and its valuation picture.
Industry Underperforms S&P 500 but Outperforms Sector
The Zacks Transportation - Shipping industry has lagged the Zacks S&P 500 composite index but surpassed the broader sector over the past year.
Over this period, the industry has gained 29.5% compared with the S&P 500 Index's northward movement of 31.5%. The broader sector has appreciated 8.6% in the same timeframe.
Industry's Current Valuation
Based on the forward 12-month price-to-sales(P/E- F12M), a commonly used multiple for valuing shipping stocks, the industry is currently trading at 7.7X, compared with the S&P 500's 21.9X. It is also below the sector's P/E (F12) reading of 16.72X.
Over the past five years, the industry has traded as high as 11.1X, as low as 3.96X and at the median of 5.76X.
3 Transportation -Shipping Stocks to Bet On
ZIM Integrated Shipping, based in Israel, provides service to the East Mediterranean and Israeli ports. Continued fleet expansion initiatives are likely to have driven the company's performance. ZIM's shareholder-friendly approach is also praiseworthy.
ZIM currently sports a Zacks Rank #1 (Strong Buy). ZIM has seen the Zacks Consensus Estimate for 2024 earnings being revised 441% upward over the past 60 days. ZIM shares have surged 113.7% in a year's time.
You can see the complete list of today's Zacks #1 Rank stocks here
Seanergy Maritime, a dry bulk shipping company, is benefiting from the improving sentiment surrounding the Capesize market. Its shareholder-friendly approach bodes well for the company.
SHIP currently flaunts a Zacks Rank #1. The Zacks Consensus Estimate for SHIP's 2024 earnings has been revised 3% upward over the past 60 days. SHIP shares have surged 113.6% in a year's time.
Euroseas is an owner and operator of container carrier vessels and a provider of seaborne transportation for containerized cargoes. The company has been benefiting from profitable contracts and maintains a time charter equivalent rate of more than $30,000 per day.
The stock has gained 76.3% over the past year. Currently sporting a Zacks Rank #1, the Zacks Consensus Estimate for 2024 earnings has increased 36.5% over the past 60 days.
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