Will marine shipping stocks soon enter choppier waters?

There is a new sector stowed away among today’s top performers – the marine shipping industry. Year to date, it has significantly outperformed broader markets.

Given the sector’s ultra-seaworthy momentum, you must ask yourself an essential and timely question: will the sailing for this group go as smoothly in the coming months? More importantly, will this sector provide a safe harbour for investors?

According to industry analysts, the marine shipping industry, which includes companies that provide waterborne cargo shipping and cargo shipping-related services, may not possess much upside potential. Many market watchers have, in fact, downgraded the sector’s fundamental investment outlook. Here’s why:

• Murky global market trends
• Higher vessel capacity
• Possibility of new tariffs on Chinese imports (currently the main driver of growth for this industry)
• Prospect of declining freight rates next year (because of decreasing capacity utilization)
• Negative impact of stubbornly high fuel and steel prices (despite attempts by shippers to hike prices and surcharges to offset the higher costs)
• Relatively lofty valuations (the group’s projected price-to-earnings multiple for 2005 is at a substantial premium to that of other, more fundamentally sound sectors)

The end result could be much slower growth – in other words, very little upside potential for marine shipping stocks.

Do not despair, though. There could be some good news on the horizon for the some shippers in this group. Here are the main items that may shore up these outfits and, in turn, investors:

• Projections of a 12.5% increase in global container volume in 2005 (due mainly to exports from China)
• Prospect of double-digit growth in 2005 freight rates for shipments to and from Europe

As a result, the marine shipping industry’s momentum looks most favourable for companies with global fleets.

Some of the stocks that fall into this group include the following: Alexander & Baldwin, BAX Global, CP Ships, Halterm Income Fund, Logistec, Oceanex Income Fund, Trailer Bridge and World Point Terminals.

August 2005

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.