Elevated China Freight Rates Will Continue, But Vessel Delays And Shrinking Margins May Impact Future Performance

Key Takeaways

• Higher freight rates in China's service and U.S. supply chain focus could boost Matson's revenue and net margins in the near term.
  
• Strategic capital allocation through share buybacks and vessel capacity expansion aims to enhance EPS and long-term growth potential.
  
• Decreased container volume and lower freight rates, along with an impairment charge and delays in vessel construction, could negatively impact Matson's revenue growth and earnings.

Catalysts

Engages in the provision of ocean transportation and logistics services.

• Matson's China service is experiencing significantly higher freight rates, supported by a stable U.S. economic environment and tightened supply chain conditions, which could continue to boost revenue growth in the near term.
  
• The proposed USTR rule and changes in tariffs could potentially redirect some air freight demand to Matson's expedited ocean services, positively impacting future revenue and operating income.
  
• The U.S. economy and Matson's strategic focus on supply chain reliability and schedule integrity might allow the company to maintain elevated pricing in its China service, supporting sustained net margins.
  
• Matson's capital allocation strategy includes continued share buybacks, which could enhance earnings per share (EPS) as it returns excess capital to shareholders.
  
• The anticipated delay in the delivery of new vessels from the Philly Shipyard could lead to temporary opportunity costs but underscores the company's focus on enhancing future capacity and growth potential, possibly influencing revenue and operating efficiency improvements in the long term.

Matson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Matson's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.9% today to 7.5% in 3 years time.
• Analysts expect earnings to reach $248.9 million (and earnings per share of $8.6) by about March 2028, down from $476.4 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 23.8x on those 2028 earnings, up from 8.8x today. This future PE is greater than the current PE for the US Shipping industry at 4.4x.
• Analysts expect the number of shares outstanding to decline by 3.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Matson Future Earnings Per Share Growth

Risks

• The Hawaii and Guam trade lanes experienced a decrease in container volume year-over-year due to lower general demand, which could negatively affect revenue growth in these regions.
  
• Matson's financial results are significantly impacted by freight rates in the China service, which are influenced by geopolitical conditions and potential disruptions in the Red Sea; a normalization in trade conditions could lead to a decrease in rates, impacting revenue and operating income.
  
• The SSAT joint venture incurred an impairment charge resulting in a notable reduction in net income and diluted EPS; further operating lease challenges could continue to impact earnings negatively.
  
• Matson anticipates modestly lower operating income from its Logistics segment in 2025 due to challenging business conditions in transportation brokerage and supply chain management, potentially affecting the company's overall earnings.
  
• The company's new vessel construction program is facing a delay of approximately 4 months, which could lead to opportunity costs and delay in capacity benefits, impacting future revenue growth and capital expenditure plans.

Valuation

• The analysts have a consensus price target of $167.5 for Matson 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 2028, revenues will be $3.3 billion, earnings will come to $248.9 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $127.17, the analyst price target of $167.5 is 24.1% 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.