First Quarter Earnings: What to Expect
How will shipping companies perform in a reporting season full of high expectations?
By Jack O’Connell
Earnings season is in full swing and, as expected, the results so far are good. Last week it was UPS and Google and GE – all with impressive gains. This week it’s Apple and J&J and Citicorp, along with a host of other financial giants, most of whom have managed – to their credit (pun intended) – to pay Uncle Sam back for bailing them out at the height of the financial crisis. They reported strong gains as well. Why? Because the economy is no longer on life (i.e., government) support and is showing signs of being able to stand on its own two feet, and because last year’s first quarter results were so weak – meaning favorable year-over-year comparisons. And let’s hope this trend continues: Wall Street is counting on upbeat earnings reports to drive the next phase of the stock market’s remarkable recovery and entice the small investor back into stocks.
No less an authority than Jeremy Siegel, Professor of Economics at Pennsylvania’s prestigious Wharton School of Business and author of Stocks for the Long Run, noted in an interview last week that, despite the Dow’s reaching 11,000, stocks still had a ways to go: “Right now, stocks are selling at around 15-and-a-half times projected 2010 operating earnings. Many people say, ‘Isn’t that about average?’ The answer is yes. But coming out of a recession, that is actually a very low valuation. I did a study about the average price-earnings ratio of the market for the next full year out of a recession and it turns out to be 18 and a half. We are about 15 or 20 percent discounted from the average price of stocks coming out of a recession. That’s why I think there is room for stocks to run up.” (To read the full interview, visit http://knowledge.wharton.upenn.edu/article.cfm?articleid=2472.)
Okay, all well and good, but what about shipping stocks? They don’t necessarily follow the crowd and, as savvy MarEx readers know, they are notoriously cyclical. For the answer to that question, I tuned in to BB&T Capital Markets “Commodity Transportation Outlook” conference call last week, and was not disappointed. “Ore and oil,” observed Mike Reardon of Imarex, Inc., “that’s what driving the markets.” And indeed it is. On the drybulk side, iron ore imports to China are up more than 40 percent from a year ago and show no signs of abating. In fact, noted Jeff Landsberg, President of Commodore Research & Consultancy, China is currently building the largest iron ore terminal in the world to handle the rising tide of imported ore. Similarly, coal imports have more than tripled over the same period. And don’t forget about India. Everybody talks about China and its voracious appetite for anything mined or drilled, but India is starting to make its presence known as well, particularly on the coal front. Despite short-term volatility and continued low rates (see illustration of how far and fast rates can fall), Landsberg remains bullish on the outlook for drybulk companies in the coming months.
“The market with nine lives” is how Imarex’s Reardon characterizes the tanker business. “Reports of its death are greatly exaggerated,” he adds, pointing out that rates for “Vs” (VLCCs) are currently in the high $50,000 range and that operating costs for a typical V run about $12,000 a day ($33,000 if financed or leased). So plenty of room for profit there. The trend toward longer hauls, such as from West Africa to the Far East and the AG (Arabian Gulf) to the Far East, is benefiting the market for Vs, as is increasing OPEC production. Although the period from April through the summer is traditionally a slow one for oil demand and hence for tankers, Reardon does not see that happening this year as the global economic recovery takes hold, particularly in the emerging markets, and the demand for crude rises. For the smaller classes of tankers, the Suezmaxes and Aframaxes and MRs (Medium Range), the situation is not quite as rosy. Ditto for product carriers. So companies with a relatively high percentage of Vs in their fleet should continue to do well.
Looming over all these forecasts is the dark cloud of newbuilds coming onto the market, particularly on the drybulk side. Commodore’s Landsberg pooh-poohs this, pointing to what happened last year, when far fewer ships were delivered than originally forecast. His prediction? Out of 350 scheduled Capesize deliveries in 2010 (more than one-third of the existing fleet), maybe 180 will hit the water. This compares with 102 last year and an average of 40 per year from 2000 to 2008. So still a very large number, but not a scenario for panic. The situation on the tanker side is less critical, but nonetheless way above average in terms of number of scheduled deliveries and thus cause for some concern.
Drybulk stocks are currently trading near their 52-week lows and would seem to have nowhere to go but up. Yet the Baltic Dry Index, a reliable measure of freight rates, remains stalled around the 3,000 level (it was at 11,000 at the height of the boom). Many tanker stocks, on the other hand, are at or near their 52-week highs with expectations for further gains. These companies, both tanker and drybulk, are among the last to report earnings (in some cases, because they are on a non-calendar year basis), but pay attention on Tuesday, May 4. That’s when Genco (General Shipping & Trading) and OSG (Overseas Shipholding Group) report their first-quarter results. These companies are good bellwethers for the rest of the drybulk and tanker industries, respectively, and their results should foretell which way the wind blows. Ore and oil. So far in 2010 the tanker market has outperformed all expectations while the drybulk market has lagged. Let’s see if these trends continue. – MarEx
Jack O’Connell is Senior Editor of The Maritime Executive. The opinions expressed in this column are his and his alone.