Shipping stocks tanked yesterday with several big names including ZIM Integrated Shipping (ZIM), Frontline Plc (FRO), and Teekay Tankers (TNK) losing ground amid the improving possibility of a cease-fire between Israel and Hamas that will likely put an end to the aggressive attacks on ships passing through the Red Sea. These attacks are primarily conducted by Houthis. If peace talks are successful, freight rates are likely to come down from their recent highs, affecting the profit margins of shipping companies. The Drewry World Container Index, which is a popular gauge for measuring freight rates, has more than doubled in the last 12 months due to geopolitical uncertainties, especially in the Middle East. Kepler Cheuvreux chief analyst Axel Styrman believes that a ceasefire will result in a massive 4% boost in global fleet capacity within 4 weeks as shipping companies will feel more at ease deploying new capacity.
Although shipping companies may take a hit due to potentially lower freight rates in the future, most of these companies are valued at very attractive levels today, presenting investors an opportunity to consider. For instance, ZIM Integrated, Frontline, and Teekay Tankers are valued at forward P/E multiples of just 9.8, 8.25, and 5.01, respectively, in comparison to the S&P 500 forward P/E of 21.
Why Shipping and Logistics Have Been Sailing Rough Seas
Shipping companies have faced several challenges in the recent past, the most prominent one being geopolitical tensions that have impacted their ability to deploy capacity to cater to the surging demand. The trade war between the U.S. and China, tensions in Eastern Europe, and the Israel-Hamas war are a few of these geopolitical issues. The industry is also facing massive labor shortages, with Maritime Executive reporting that labor shortages have hit a 17-year high. These shortages are expected to last through 2028 with only a limited number of seafarers entering the field. However, a potential ceasefire between Israel and Hamas should accelerate the growth of the global seafarer talent pool.
What To Make Of The Industry Going Forward
Some Wall Street analysts are warning investors of the potential negative impact of a major decline in freight rates. Citi analyst Sathish Sivakumar recently downgraded ZIM Integrated to a sell rating as he believes the 70% rise in spot freight rates since the end of Q1 is unsustainable. However, many analysts believe that the global shipping industry will continue to see strong demand in the foreseeable future because of the booming e-commerce industry and the inventory restocking efforts of businesses to avoid disruptions similar to what occurred during the pandemic days. In addition, there has been a major slowdown in shipbuilding in the last few years, which is likely to have a positive impact on freight rates for some time.
Neither Julie Stoller nor Stocks.News have positions mentioned in the contents of this article.
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Dilantha is a former buy-side equity analyst who now contributes to Seeking Alpha, GuruFocus, TipRanks, and ValueWalk. He is the founder of Beat Billions, a premium investment research subscription service on Seeking Alpha’s Marketplace. He has appeared on CNBC and Bloomberg to discuss stock markets and the global economy.