MATX - Matson Is A Solid Company But Its Fate Relies On Extraneous Variables

2024-01-02 13:27:15 ET

Summary

• Matson, Inc. has reported a decline in Q3'23 revenues and net income due to decreased operating cash flows.
• Matson's operational strategy and niche roles in the shipping industry contribute to its unique network and diversified cash flows.
• Despite trading at fair value, Matson has long-term upside potential and is rated as a 'buy'.

Matson, Inc. ( MATX ) is a Honolulu, Hawaii-based shipping and logistics firm which operates services across the Pacific, including Hawaii, Alaska, Guam, Micronesia, the South Pacific, China, and Japan. The firm also maintains a 35% ownership in SSAT, which operates 8 West Coast terminals.

Through these activities, Matson has supported Q3'23 revenues of $827.50mn - down 25.77% YoY - alongside a net income of $119.90mn - a 54.92% decline - and a free cash flow of $91.40mn - a 75.02% decline driven by decreased operating cash flows.

Introduction

A key differentiator of Matson's operational strategy remains the parallel geographic presence of the firm as well as the niche roles it serves, for instance serving as one of the only major shippers with a presence in Guam and Micronesia.

This enables Matson to fulfill the first of its seven-part thesis, discussing how Matson maintains a unique network connecting Pacific trade, can generate margin-enhancing premiums, supports increasingly diversified cash flows from distinct routes and trade lanes to port fees, is experiencing material organic growth through new vessels, routes, and shipping fee growth, generates more stable cash flows due to its niche and diversified role, is committed to returning capital to shareholders, and maintains a solid balance sheet.

Due to this operational strength, in spite of the firm trading at fair value, I believe Matson has a material long-run upside, leading me to rate the firm a 'buy'.

Valuation & Financials

Trailing Year Performance

In the TTM period, Matson's stock is up 72.19% and has outperformed both TradingView's Shipping Industry Index - down 24.02% - and the broader market, as represented by the S&P 500 ( SPY ) - up 23.96%.

While the shipping industry and companies within generally move with ocean freight rates, Matson's Pacific orientation, niche servicing model, and overall diversified cash flows insulate the firm from the volatility associated with freight rates. For instance, although many firms saw their stock prices rise with ocean freight rates following the Red Sea attacks, the same cannot be said for Matson.

Comparable Companies

While shipping firms generally maintain homogenous operational postures, Matson differentiates itself by its integrated and niche-servicing approach. As such, rather than compare Matson with wholly direct competitors, I chose similarly-sized supply chain firms as listed on Seeking Alpha's 'Peers' tab on Matson's page. This group includes the Houston, Texas-based commodity, tank barge operator, the Kirby Corporation ( KEX ), the Hamilton, Bermuda-based dry bulk shipping company, the Golden Ocean Group ( GOGL ), and the Marousi, Greece-headquartered dry bulk seaborne logistics firm, Star Bulk Carriers Corporation ( SBLK ).

As demonstrated above, Matson has, by far, seen the best growth among the peer group, with its 72.19% growth outpacing Kirby's second-best growth of 22.17%. Despite this, I believe Matson has some room to grow, especially when assessing the firm on its multiples and growth capabilities.

For example, Matson maintains the second-lowest trailing and forward P/E ratio of the group, alongside the lowest P/S ratio, and second-lowest P/CF ratio. However, the firm does have the highest P/B ratio, demonstrating how the firm can extract greater value from fewer assets in my view.

Additionally, the company has seen leading ROE and ROA. Along with this, the company holds the lowest debt/equity ratio and highest book value per share, enabling fiscal stability and long-run reinvestment potential.

Valuation

According to my discounted cash flow valuation, at its base case, the net present value of Matson is $114.66, meaning, at its current price of $109.26, the stock is undervalued by ~6%.

My model, calculated over 5 years without perpetual growth built-in, assumes a discount rate of 9%, balancing the greater, macro cost of capital with Matson's debt-light capital structure and relatively low implied volatility. Additionally, to remain conservative, I estimated a forward 5Y revenue growth rate of 7%, despite a trailing 5Y arithmetic average of 18.24%, since the trailing average was distorted by COVID-19 and associated black swan events.

Alpha Spread's multiples-based relative valuation tool, on the other hand, estimates a 30% overvaluation, with a relative value of $76.24. However, while Alpha Spread's analysis is informative, the model fails to account for outliers in its data in my opinion, skewing Matson's value.

As such, I believe Matson's fair value is the net present value I calculated.

Matson is Well-Positioned to Support Scale & Margin Expansion

Despite deteriorating relations between China and the US, Matson still sees China among its principal growth engines. The company can provide cost-effective transport opportunities through its ocean transit system, which prioritizes customer satisfaction and engagement. Additionally, through its vertical integration of products and terminal ownership, Matson is able to streamline procedures and provide superior destination services. Matson's capabilities enable perpetual growth potential in Chinese trade.

More broadly, Matson's fourfold service model provides expense base management capabilities through vertical integration, while diversifying cash flows, ensuring long-term growth vectors, and leading to general scale and margin enhancement. For instance, Matson has seen operating income margins rise from ~2% in 2017 to >6% in the previous quarter through this strategy.

Wall Street Consensus

Analysts, who are still positive on the stock, are generally more neutral on Matson, estimating a 1Y price target of $111.67- a 1.89% increase.

Even at the minimum projected price target of $102.00, analysts only predict a 6.93% price decline, reflecting the firm's resilience in my view, even in the face of macro uncertainty.

Risks & Challenges

Geopolitical Risk May Reduce Shipping Volumes

Since Matson cites its Chinese operations as one of its primary growth engines, the firm is highly sensitive to the ever-evolving diplomatic relationship between China and the US. For example, a rehash of the 2018 Trade War may reduce shipping volumes, or any tensions around Taiwan may lead to regulatory or cost increases which make Matson's Chinese operations untenable.

Higher Interest Rates May Compress Underlying Demand

Although the firm has become highly diversified in its operations, Matson holistically operates as a supply chain company and therefore is responsive to changes in consumer demand and shipping volumes. Reductions in the latter would reduce Matson's revenues and net income, thus reducing the company's ability to reinvest, and leading to a vicious cycle of poorer outcomes until consumer demand rises again.

Conclusion

Looking forward, Matson is a stability-oriented, vertically integrated shipping company capable of simultaneous margin and scale expansion, but highly sensitive to geopolitics in the Pacific.

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