Is Danaos Corporation (NYSE:DAC) Potentially Undervalued?

By
Simply Wall St
Published
February 23, 2022
NYSE:DAC
Source: Shutterstock

While Danaos Corporation (NYSE:DAC) might not be the most widely known stock at the moment, it received a lot of attention from a substantial price increase on the NYSE over the last few months. With many analysts covering the stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, what if the stock is still a bargain? Today I will analyse the most recent data on Danaos’s outlook and valuation to see if the opportunity still exists.

See our latest analysis for Danaos

What is Danaos worth?

The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Danaos’s ratio of 1.83x is trading slightly below its industry peers’ ratio of 4.71x, which means if you buy Danaos today, you’d be paying a reasonable price for it. And if you believe that Danaos should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. Is there another opportunity to buy low in the future? Since Danaos’s share price is quite volatile, we could potentially see it sink lower (or rise higher) in the future, giving us another chance to buy. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

Can we expect growth from Danaos?

earnings-and-revenue-growth
NYSE:DAC Earnings and Revenue Growth February 23rd 2022

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. However, with an extremely negative double-digit change in profit expected over the next couple of years, near-term growth is certainly not a driver of a buy decision. It seems like high uncertainty is on the cards for Danaos, at least in the near future.

What this means for you:

Are you a shareholder? Currently, DAC appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on DAC, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on DAC for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help gel your views on DAC should the price fluctuate below the industry PE ratio.

With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 5 warning signs for Danaos you should be mindful of and 2 of them don't sit too well with us.

If you are no longer interested in Danaos, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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