Securing Charters Will Stabilize LPG Shipping Revenue, Yet Competition May Limit Future Earnings

Key Takeaways

• Securing a majority of charter days ensures stable revenue and reduces exposure to market volatility, supporting financial predictability.
  
• Strategic market focus and fleet positioning suggest positive earnings through higher freight rates and emerging trade opportunities.
  
• Focus on regional trade and geopolitical tensions may constrain earnings growth, while increased competition from new carriers could pressure future earnings without strong demand growth.

Catalysts

Provides seaborne transportation services to liquefied petroleum gas (LPG) producers and users worldwide.

• StealthGas is expected to benefit from securing 65% of its charter days for 2025, ensuring around $100 million in revenue, which provides a stable revenue stream and reduces exposure to spot market volatility.
  
• The company’s strategic focus on the Western market, where freight rates command a premium due to geographic and political barriers, is likely to sustain or improve revenue margins given the scarcity of well-maintained vessels in Europe.
  
• A limited order book for new LPG vessels, especially in the small pressurized category, combined with an aging fleet and stringent regulations, suggests the potential for higher rates due to supply shortages, positively impacting future earnings.
  
• Continued deleveraging strategy, with a significant reduction in debt and strong liquidity position, is anticipated to lead to reduced interest expenses and improved net margins, enhancing overall financial health and profitability.
  
• Investments in ammonia trade and maintaining larger vessels capable of carrying this increasing cargo type position StealthGas well for future market opportunities, potentially boosting revenue and earnings from new trade routes.

StealthGas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming StealthGas's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 40.4% today to 24.0% in 3 years time.
• Analysts expect earnings to reach $40.9 million (and earnings per share of $1.13) by about December 2027, down from $63.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2027 earnings, up from 2.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.71%, as per the Simply Wall St company report.

StealthGas Future Earnings Per Share Growth

Risks

• The company's revenues slightly decreased by 3% from the previous quarter, and operational utilization was lower due to heavy dry-docking, which could negatively impact future revenue growth if not strategically managed.
  
• StealthGas's focus on regional trade with shorter voyages limits its revenue potential from long-distance trades, which could constrain earnings growth opportunities.
  
• The recent decrease in net income for the third quarter by 23% compared to the same quarter last year, despite adjusted figures showing improvement, indicates potential concerns regarding earnings stability.
  
• Risks related to geopolitical tensions, such as Houthi attacks impacting navigability, could affect trade routes and freight rates, possibly impacting both revenue and net margins.
  
• The escalating order book for medium gas carriers (MGCs), projected at 50% of the existing fleet, suggests increased competition and possible downward pressure on future earnings unless offset by strong demand growth like the ammonia trade.

Valuation

• The analysts have a consensus price target of $10.0 for StealthGas based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $170.3 million, earnings will come to $40.9 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 12.7%.
• Given the current share price of $4.97, the analyst's price target of $10.0 is 50.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.