Refinery Activity Will Drive Higher Barge Utilization In 2025

Key Takeaways

• Strong growth driven by increased refinery activity and barge utilization is expected to enhance revenues and earnings.
  
• Control over costs, despite inflation and shortages, should enhance net margins and earnings stability long term.
  
• Vulnerability to weather, weak oil and gas market, and inflation could impact earnings, while strong power generation demand is critical to revenue stability.

Catalysts

Operates domestic tank barges in the United States.

• Kirby anticipates strong growth in 2025 driven by increasing refinery activity and improved barge utilization, which is expected to enhance revenues.
  
• The company expects inflationary pressures to drive up spot and contract pricing in the marine transportation segment, positively impacting net margins.
  
• Continued high demand for coastal barges, coupled with limited availability of large capacity vessels, is projected to result in higher term contract renewals and spot market rate increases, bolstering earnings.
  
• The distribution and services segment is experiencing significant growth in power generation orders, contributing to a growing backlog, which should support future revenue streams.
  
• Kirby's ongoing efforts to control costs and improve operational efficiencies, even amid inflation and mariner shortages, are likely to enhance net margins and earnings stability over the long term.

Kirby Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kirby's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $526.4 million (and earnings per share of $9.77) by about April 2028, up from $286.7 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 16.0x on those 2028 earnings, down from 18.7x today. This future PE is greater than the current PE for the US Shipping industry at 3.8x.
• Analysts expect the number of shares outstanding to decline by 2.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.59%, as per the Simply Wall St company report.

Kirby Future Earnings Per Share Growth

Risks

• Seasonal weather disruptions and maintenance activities in marine transportation affected operations and revenues, indicating vulnerability to external conditions that could impact earnings.
  
• There is a noted decline in oil and gas revenues due to a soft market for conventional diesel fracturing equipment, affecting Kirby's Distribution and Services segment revenue and operating income.
  
• Inflationary pressures and mariner wage inflation are ongoing challenges, which could constrain net margins and require continual price adjustments to maintain profitability.
  
• The planned shipyard activities in the coastal business are expected to impact revenues and margins into 2025, potentially limiting earnings growth if operational execution or market conditions falter.
  
• The reliance on a strong power generation backlog and demand needs to continue to offset weaknesses in other areas, such as conventional oil and gas, to sustain revenue levels. Any slowdown in these orders could have negative financial implications.

Valuation

• The analysts have a consensus price target of $131.333 for Kirby based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $141.0, and the most bearish reporting a price target of just $109.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $526.4 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 6.6%.
• Given the current share price of $94.2, the analyst price target of $131.33 is 28.3% higher.
• 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.