Shipping Stock Outlook: Prospects Hurt By Multiple Headwinds

The shipping industry is often considered the lifeline of the global economy. This is because it is responsible for transporting a bulk of the goods involved in world trade. Increased demand for commodities from key emerging markets and Europe is a positive for the industry.

However, escalating tensions pertaining to a trade war between the United States and China — the two largest economies — do not bode well for international trade. The dispute shows no signs of relenting. In fact, the tariff exchanges might take a more severe turn in the coming days. It could also trigger a deeper dispute between the two nations. Trade wars are never beneficial as they eat into profit margins of companies, eventually crippling the overall economy.

In the event of a slowdown in global trade, the shipping industry will be hurt badly. In fact, trade war tensions have already hit the dry bulk sector badly. Moreover, the rise in fuel costs is a concern for the companies. This is because expenses associated with oil are considered one of the major input costs for any transportation player. According to a Reuters report, shipping fuel costs will increase by 25% in 2020, following the implementation of rules to check pollution by ships.

Moreover, ratings agency Moody’s has assigned a negative 12-month outlook for the tanker segment in the face of surging supplies. Due to excess supply, charter rates are anticipated to remain low in the next few quarters.

Industry Underperforms on Shareholder Returns

Judging by shareholder returns over the past year, it seems that an improving domestic economy and an upbeat demand scenario from the key emerging markets and Europe weren’t enough for instilling investors’ confidence as far as the industry’s growth prospects are concerned.

Headwinds like high costs, trade war-related tensions and a bleak outlook for the tanker segment have contributed to investors’ pessimism surrounding the space.

The Zacks Transportation Shipping industry, which is a 48-stock group within the broader Zacks Transportation Sector, has underperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively gained 3.1%, the Zacks S&P 500 Composite and Zacks Transportation Sector have rallied 15.3% and 7.3%, respectively.

One-Year Price Performance

Shipping Stocks Not Trading Cheap

Despite the industry’s underperformance over the past year, the valuation does not look cheap now. One might get a good sense of the industry’s relative valuation by looking at its EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio, which is often used to value the industry, given their significant debt levels and high depreciation and other expenses.