Shipping PE Ratio Will Inflate To 228X Amidst Earnings Decline

Key Takeaways

• Elevated freight rates, e-commerce growth, and airfreight conversion are expected to boost Matson's revenue and margins.
  
• Share repurchases and new vessels may enhance earnings per share and operating margins through efficiency and reduced share count.
  
• Robust freight rates, logistics contributions, and e-commerce growth enhance Matson's financial stability, supporting earnings growth and enabling debt reduction and share repurchases.

Catalysts

Engages in the provision of ocean transportation and logistics services.

• Matson expects elevated freight rates in their China service to continue, driven by a resilient U.S. economy, stable consumer demand, and tighter supply chain conditions, positively impacting future revenue and operating income.
  
• The growth of e-commerce and the conversion from airfreight to Matson's CLX and MAX services are seen as sustainable demand drivers, suggesting potential future increases in revenue and contributing to higher margins.
  
• The company anticipates a higher contribution from its terminal joint venture, SSAT, due to an expected increase in lift volume, which could positively affect revenue from logistics operations.
  
• Matson plans to continue its share repurchase program in the absence of large growth investments, potentially boosting earnings per share by reducing the share count.
  
• The introduction of new Aloha Class vessels, capable of increasing container capacity in their China service, is expected to enhance future revenue and potentially improve operating margins by increasing efficiency.

Matson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Matson's revenue will decrease by -1.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.4% today to 6.2% in 3 years time.
• Analysts expect earnings to reach $197.3 million (and earnings per share of $8.55) by about December 2027, down from $410.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2027 earnings, up from 11.6x today. This future PE is greater than the current PE for the US Shipping industry at 4.2x.
• Analysts expect the number of shares outstanding to decline by 11.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.47%, as per the Simply Wall St company report.

Matson Future Earnings Per Share Growth

Risks

• Matson reported significantly higher year-over-year freight rates and operating income in its China service due to strong freight demand and a resilient U.S. economy, suggesting potential for continued strong revenue and earnings.
  
• The company achieved increased contributions from logistics, particularly supply chain management and transportation brokerage services, which could support improved net margins and earnings.
  
• Matson's joint venture, SSAT, showed improved profitability due to higher lift volume, indicating potential for further revenue and earnings growth.
  
• Matson continues to generate substantial cash flow, enabling debt reduction and share repurchases, reflecting strength in earnings and financial stability.
  
• The conversion of airfreight to Matson's expedited ocean services, driven by the growth of e-commerce, presents an opportunity for sustained demand, positively impacting revenue and margins.

Valuation

• The analysts have a consensus price target of $150.5 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 2027, revenues will be $3.2 billion, earnings will come to $197.3 million, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 6.5%.
• Given the current share price of $143.58, the analyst's price target of $150.5 is 4.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.