U.S. inflation rates hit a 40-year high of 7.9% on the consumer price index (CPI) in 2022, which is massively above the Federal Reserve's 2% target. This high inflation has caused the Fed to finally set out a plan to increase interest rates.
According to a global study from the International Monetary Fund, shipping costs are a key driver of inflation. When freight rates double, inflation tends to increase by 0.7%. Therefore, as the majority of international commerce companies are having their profit margins squeezed by both high shipping rates and inflation, shipping companies are benefiting massively in terms of profits and cash flows.
In this article, I reveal my top three shipping stock picks: Navios Maritime Partners (NMM, Financial), Zim Integrated Shipping Services (ZIM, Financial) and Danaos Corp. (DAC, Financial).
1. Navios Maritime Partners
Navios Maritime Partners (NMM, Financial) is an ocean freight transportation company based in Greece. The company operates over 140 vessels that have a market value of over $5 billion. They are moving towards a diversified business model through investment into different shipping segments such as tankers, container ships and dry bulk carriers. This should offer some shielding from the cyclical nature of the commodity and shipping industry.
For 2021, the company reported some incredible results for the year with revenue of $713 million, adjusted Ebitda of $426.5 million and adjusted net income of $364.1 million. This is expected to be stable moving forward as the company reported over $2.2 billion in contracted revenue on container ships with top container shipping companies.
The company has a net vessel equity value of $3.5 billion, whereas the stock trades at just over a $1 billion market cap; thus, it represents a significant discount to the value of its assets.
2. Zim Integrated Shipping Services
Zim Integrated Shipping Services (ZIM, Financial) is a global shipping provider which operates a fleet of 110+ vessels across mainly the Asia-America routes. In addition, the company is investing heavily into the building of new vessels for usage in emerging growth markets such as Africa and Latin America. They have a vision to be the global provider of shipping and are doing a fantastic job of this so far.
The great thing about Zim is they run an asset-light business model based on the chartering of vessels, which can give them an advantage in terms of capturing market opportunities.
Source: Zim's investor materials
The company produced some stellar financial results for the last quarter of 2021, with revenues increasing by 155% to $3.47 billion. In addition, they generated adjusted Ebitda of $2.36 billion for the fourth quarter, which was up a massive four-fold from $531 million in the year prior.
Zim then went onto to pay a monster dividend of $17 per share, which equated to a massive 23% of their share price!
Moving forward, revenue growth is expected to increased by approximately 7% in fiscal 2022, and although I wouldn’t expect super high shipping rates like now to continue forever, the company is still expected to do well. Zim is trading at a low price-earnings ratio of 1.9, which is less than rivals in the industry such as Navios Danaos Corp. (DAC, Financial).
3. Danaos Corp
Danaos Corp. (DAC, Financial) is a Greek shipping company which owns a fleet of container ships and charters them at fixed rates to global ocean liner companies.
The company reported adjusted Ebitda of $159 million for its fourth quarter of 2021, up 95% compared to the prior-year quarter. In addition, the company also is a major shareholder in Zim, which saw its share price rise by five-fold in 2021. This has caused the net income for Danoas to reach over $1 billion, which is incredible for a company with a $2.13 billion market cap.
Moving forward, Danaos has secured contracts for 95% of its ships in 2022, 77% for 2023 and even 57% for 2024. This means stable cash flows are expected moving forward, which is the main risk for the highly cyclical shipping industry.
One potential warning sign is that the company did offer a less than spectacular dividend, just $0.75 per share for the last payment, but some analysts believe this reflects the company's long-term outlook and investments for growth.
Final thoughts
The rising cost of freight has caused companies in the industry to benefit immensely from being able to charge higher rates. The three companies on this list have all seen monster growth, and one even paid out huge dividends as a result. However, according to a study by McKinsey & Co., freight prices are expected to normalize at only somewhat higher levels than in 2019. Thus, awareness of this should be taken into account moving forward, even though these companies offer strong fundamentals at low valuations.
