Analyzing Key Crude Tanker Industry Trends in September 2015
Valuation ratio for the shipping industry
Shipping companies are cyclical and volatile in nature. These capital-intensive companies are similar to upstream companies (XOP) with high levels of depreciation and amortization. These companies have varying degrees of financial leverage. As a result, they’re better valued and compared using EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization).
Industry’s EV/EBITDA multiple
We’ve calculated the industry’s forward EV/EBITDA by considering only pure-play companies like Frontline (FRO), Nordic American Tankers (NAT), DHT Holdings (DHT), and Euronav (EURN). The average forward EV/EBITDA multiple on September 28, 2015, was 5.5 and the median multiple was 5.4. The average multiple rose compared to the week before when the average and median were 5.6 and 5.3, respectively.
In the shipping industry, valuations are generally higher in bad times when profitability is lower. Similarly, valuations are lower in good times. Historically, falling valuations have been followed by a rise in stock prices. While looking at a lower forward EV/EBITDA valuation, we also need to assess analysts’ estimates.
EBITDA estimates
In the last month, crude tanker companies’ EBITDA estimates rose marginally by 0.50%–0.75%. Frontline’s EBITDA estimate rose by 8% to $41.4 million compared to the previous estimate of $38.2 million.
Since tanker rates are rising and bunker fuel prices are falling, there’s a high possibility that analysts will increase the EBITDA estimates for 3Q15.
It’s important to assess whether these estimates are too high or too low. If analysts’ estimates are considered to be at an appropriate level, then these lower valuation multiples indicate that good times are ahead for stock returns.
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