Smooth Sailing Ahead for This 100-Year-Old Shipping Company
Alpesh Patel|July 17, 2023
The global shipping industry has been through the wringer over the past few years.
After experiencing an incredible boom thanks to pent-up pandemic demand, the industry has cooled off considerably.
But one leading shipper has caught my eye… and its strong numbers make it this week’s Stock of the Week.
Based in beautiful Hawaii, this 100-year-old shipping and logistics company dominates routes through the Pacific. It’s also a dividend payer with strong earnings and healthy profit margins.
It boasts an impressive cash return on capital invested – or CROCI. That’s a telltale sign of quality and momentum.
And since January, when its technical indicators found a bottom, the stock has been on the rise.
It’s a good time to hop on board.
Get all the details on the stock – including the ticker – in this week’s video.
Click the image below to watch it.
Hello, friends, and welcome to another Stock of the Week. I’m Alpesh Patel. I’m chief executive of an asset management company. We have a private equity arm, a venture capital arm and a hedge fund division. And I have got your Stock of the Week, my friends.
So what is the Stock of the Week this week? Remember, my team collect these for me. They give me a short list of stocks based on valuation… growth, such as earnings growth, revenue growth… dividend yields… cash flow growth… momentum… all of these factors.
And yet again, we’ve got a shipping company. Shipping, it’s come out there. So we’ve got to go with the numbers. We’ve got to follow the numbers.
This week’s Stock of the Week is Matson (MATX). It’s an American shipping and navigation services company headquartered in beautiful Hawaii (where my mom went on holiday last year). Founded in 1882. Yeah, that far back… and I think Hawaii in 1882 still had the Union Jack, the British flag in the corner.
Subsidiary Matson Navigation Company provides ocean transportation and logistics services across the Pacific to Hawaii, Alaska, Guam, Micronesia (I really want to go there), the South Pacific, China and Japan.
So you’ve got a bit of a global play, a global play on trade. It’s a leader in Pacific shipping.
Matson’s ocean transportation service is recognized for its industry leading on-time arrival performance and award-winning customer service. The company’s fleet of vessels includes container ships… combination container ships… what we call, when I was a shipping lawyer, “RORO ships,” roll-on/roll-off ships… and custom designed barges as well.
The market cap is just shy of $3 billion, it’s got strong earnings and profit margins which are looking pretty healthy, and it pays dividends as well.
Let’s take a bit more of a dive into the company on that basis, shall we?
On the Alpesh Growth-Value-Income, or GVI, rating, which is my proprietary algorithm which evaluates companies based upon those factors of revenue growth… valuations, such as price to earnings… dividend yields and so on… it’s got a score of 8. Now, anything with a 7, 8, 9 or 10 meets my minimum threshold.
This is what caught my eye – CROCI, cash return on capital invested. Remember that favorite formula of mine? If you want to understand why Deutsche Bank and Goldman Sachs Wealth Management use it and how it’s so successful, click here. Matson’s CROCI is just under 30% per annum. That is a lot of cash this company is generating for the capital that it’s invested. That’s a sign of quality and good momentum in the stock price in the recent term.
Sortino is 0.6. That’s good in terms of the average return you get for the risk of missing it.
So a good reward to volatility… although, even though volatility is high at 26% – I prefer it under 20%, but you can’t have everything – it’s been outperforming the market. In other words, it’s been generating alpha.
So what have we got which caught my eye? Well, turnover is going in the right direction, borrowing is decreasing, cash flow is improving, and profits are going in the right direction as well.
Pretax profits are going in the right direction. Assets are increasing as well. Valuation… Matson has a forecast P/E ratio of 16.4. That’s not a bad multiple. It’s above its three-year average. However, for a growing company like this, a forecast P/E multiple of 16 is not overly expensive, I don’t believe.
Okay, what else have we got?
Return on capital employed is 37%. That’s a big number. Return on equity is 53%. Big number, way above its three-year averages. And, as I said, cash return on capital invested is way above its three-year average.
Now, given that the stock took a hit – as so many did last year – it now seems to, since January of this year, have found a base and started moving high.
The monthly MACD (moving average convergence/divergence) – which I really like as a bit of a shortcut, a bit of a cheat for me – is oversold, flat and now starting to rise alongside the weekly MACD. So both the weekly and monthly look like they’re going to continue rising, and that means there’s momentum for the company probably to go from roughly $76 to $110 within 12 months.
What do we have in terms of its return statistics, its return histograms? Bit of a worry in terms of volatility… Remember I said it was a bit volatile? Volatile enough to be on the -53%. That doesn’t mean it’s guaranteed to happen, but there is volatility potentially to the downside.
So you’ve got to be a bit careful with this one.
On a discounted cash flow basis, it looks undervalued. That doesn’t guarantee that the price will rise, but it looks a little bit undervalued on the discounted cash flow basis, which is good news for us because obviously we’re expecting it to rise.
So I hope you enjoyed that. I hope it gives you something of an insight into the kind of research we do for GVI Investor subscribers, the depth we go into.
This is just a “tip of the iceberg” to give you a bit of a flavor and taster of that.
Thank you very much.