Vietnam Expansion Will Diversify Shipping Amid Geopolitical Tariff Risks

Key Takeaways

• Matson’s expansion into Vietnam services aims to capitalize on shifting supply chains, enhancing revenue through increased transshipments and expedited freight from Southeast Asia.
  
• Strategic China Plus One approach mitigates US-China trade risks, aiming to improve net margins by diversifying operations and maintaining brand loyalty through reliable services.
  
• Market uncertainties and declining container volumes, alongside regulatory and operational challenges, threaten Matson's revenue, margins, and earnings across multiple segments.

Catalysts

Engages in the provision of ocean transportation and logistics services.

• Matson's expansion of their Vietnam services, including new direct service connections, is expected to capture growth from the shifting supply chain trends where companies move their manufacturing beyond China. This diversification could potentially increase revenue from additional transshipments and expedited freight originating from Vietnam and other Southeast Asian countries such as Cambodia and Thailand.
  
• Matson's strategic change to a China Plus One approach is expected to help mitigate the risks of ongoing US-China trade disruptions and tariffs. This could maintain or potentially improve net margins by diversifying their operational footprint and customer base within Asia.
  
• Despite current tariff-induced volume declines, Matson's commitment to reliable and no-blank sailings aims to strengthen its brand loyalty among customers, which could support sustained revenues and market share in the long term as trade conditions normalize.
  
• The company is leveraging longstanding relationships with feeder partners in Asia to ensure fast and efficient connections, potentially reducing operational costs while maintaining service quality. This operational efficiency could contribute positively to net margins.
  
• The elimination of the de minimis exemption for imports could lead to a shift in some formerly air-freighted e-commerce goods to ocean freight, presenting a potential new revenue stream for Matson if they capture market share from converted air freight shipments.

Matson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Matson's revenue will decrease by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.7% today to 7.3% in 3 years time.
• Analysts expect earnings to reach $237.4 million (and earnings per share of $9.87) by about May 2028, down from $512.6 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 20.0x on those 2028 earnings, up from 6.0x today. This future PE is greater than the current PE for the US Shipping industry at 4.0x.
• Analysts expect the number of shares outstanding to decline by 4.0% 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.

Matson Future Earnings Per Share Growth

Risks

• Significant uncertainties regarding tariffs, global trade, and geopolitical factors may lead to lower container volumes and freight rates, negatively impacting Matson's future revenue and earnings.
  
• Declining container volumes in key markets like China, with a reported 30% year-over-year decrease, pose risks to Matson's revenue and profitability if these trends persist longer than expected.
  
• Logistics operating income is expected to be lower due to a challenging environment across all business lines, potentially impacting Matson's net margins and earnings.
  
• The company faces increased costs for container equipment due to regulatory changes, which could impact operating expenses and net margins.
  
• Market volatility and downward pressure on freight rates, influenced by carrier responses to demand fluctuations, could lead to reduced operating income from Matson’s Ocean Transportation segment.

Valuation

• The analysts have a consensus price target of $135.0 for Matson 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 $150.0, and the most bearish reporting a price target of just $125.0.
  
• 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 $237.4 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $93.11, the analyst price target of $135.0 is 31.0% 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.