PANL - Pangaea Logistics: Giveaway Valuation And Rare Chart Strength

Summary

• Pangaea Logistics Solutions, Ltd. is fighting the price downtrend in transportation and marine shipping stocks in late 2022.
• Ultra-low valuations at or near records for Pangaea Logistics Solutions stock are noteworthy, with a trailing P/E under 3x and large discount to book value present.
• Pangaea Logistics Solutions, Ltd. shares possess a unique combination of bargain pricing on fundamentals and improving momentum on chart dissection.

I mentioned a small maritime dry bulk/commodity shipping company as a solid buy idea twice in 2021. Pangaea Logistics Solutions, Ltd. ( PANL ) has delivered a 71% total return on your investment, including dividends, over less than 23 months since I penned the first effort . This performance has handily beaten the vast majority of equities on Wall Street, generally producing losses as measured by the iShares Transportation ETF ( IYT ), SPDR S&P 500 ETF ( SPY ) or iShares Russell 2000 ETF ( IWM ).

The good news is that Pangaea holds just as much underlying value vs. the price you are paying today as two years ago! In fact, it might have smarter fundamental value at $5 now than $3 in early 2021. Plus, I really like the basing chart pattern in the second half of 2022, with momentum indicators hinting price may rise soon. I know regular readers will wonder how I could like a transportation name as the economy is entering recession. The answer is a bullish combination of factors could allow Pangaea Logistics Solutions, Ltd. shares to continue outperforming the maritime and transportation sectors, with real gains in price pushing the valuation above its net tangible asset accounting book value near $7 per share.

A decent dividend yield is also likely to be paid again in 2023, as price to earnings is in the incredibly low 3x to 5x ratio area. The near 6% cash yield is very enticing measured against Wall Street equity averages of 1.5%. Wall Street analysts are projecting a major decline in operating profitability as supply-chain shortages and more normal shipping demand appears. Yet, after a messy China reopening from zero-COVID policies early in the new year and recession globally from rising interest rates, shipping rates could rebound by late 2023 to support another year of strong income creation at Pangaea.

Management and insiders own 23% of shares outstanding, meaning retail shareholder interests are closely aligned with the decision-makers running the company. Based in Newport, Rhode Island, the company owned and operated 25 ships as of March 2022, many of them ice-cutters to cross the Arctic region. The firm is focused on specialized contracts and keeping existing customers happy. Consequently, a high number of repeat orders for shipping and loading services are part of the investment story. Sales and income have fluctuated less than peers over the years. In the end, steady and conservative guidance from the top has delivered stellar growth in cash flow and book value over the 8 years since going public (2014). Pangaea is a leading transporter through the Northwest Passage and Northern Sea Route between continents traversing the Arctic Ocean.

Bargain Valuation

Pangaea’s present share valuation on trailing results can be argued as essentially the cheapest over its years of public trading since 2014. Below is a graph of today’s highest-ever level of cash flow to debt and sales, a good DOUBLE the long-term average rates for capital efficiency. Cash flow has risen, while debts have remained stable is the math.

Basic fundamental ratio analysis points to below average to record low readings on price to trailing earnings, sales, cash flow, and “tangible” book value (hard assets like cash and ships minus total liabilities). If an industry peak for demand and pricing was hit in 2022 lasting many years, the liquidation value of Pangaea ships should support the share quote.

Even more bullish are stats using enterprise value (equity market capitalization plus total debt minus cash). EV to EBITDA (2x) and revenues (0.35x) are at record lows. Assuming today’s rate of demand for shipping moving forward, Pangaea Logistics Solutions, Ltd. is selling at a 65% discount to 8-year “median” averages on enterprise valuations.

Superb Technical Performance

Bargains are not hard to find in the stock market after a 1-year bear market on Wall Street. What is difficult is finding a cheap stock with rising investor buy interest.

Pangaea is relatively unique as 9 out of the 9 main indicators of momentum I track are now in a positive formation, which puts the company in a select group of roughly 150 stocks vs. a universe measured at 4000+ names (ignoring the fundamental undervaluation story). This bullish outlier performance is in the face of 2022’s bear market and sizable December drop in the majority of equities, while clearly countertrend to most transportation-related companies.

I have drawn a 24-month chart of daily price and volume changes below. Some of the highlights include price trending above both the important 50-day and 200-day moving averages (each rising for direction). For reference, as of Tuesday December 28th, only 33% of stocks were above their 50-day and 35% above the 200-day .

The 28-day Average Directional Index stands under 8, an ultra-low number (circled in green) indicating a balance between buyers and sellers. How rare is the ADX number? Well, this is the first time in the company’s trading history ADX has been under 8 at the same time as price is above its 200-day MA. My read of the situation is any new buying excuse may not be able to find sufficient share supply, forcing price to rise rapidly in hunt of extra sellers.

The Negative Volume Index has been quite strong over the last couple of months (marked with the red arrow). And, On Balance Volume has not budged (blue arrow), despite a decent selloff in price from June’s peak just under $7. I rate the trends in NVI and OBV as excellent over 1-year and 2-year periods.

Comparing investor performance to competitors and peers in the maritime shipping world, Pangaea has been a top gainer over the last 6-month and 1-year spans, pictured below. [Over 2-year and 3-year spans, PANL has been something of an average total return performer in the industry.]

Final Thoughts

Pangaea Logistics Solutions, Ltd. could be a leading choice to the upside if a strong January-February period for Wall Street is approaching (and we avoid a serious global recession). Unfortunately, such is not my expectation. So, I am looking for only a minor gain in price over the immediate future.

What is the downside risk on investment? As long as profits and cash flow keep coming in the door, and management stays conservative in allocating this inflow of capital, I believe it unlikely PANL price will trade well below $5 for any extended period of time. I peg downside risk to $4 in the first half of 2023, given a recession in the U.S. (and world) appears soon, with book value zigzagging to $7.50 per share in 12 months and $8 over 24 months.

The upside argument is higher price to sales and book value multiples are logical, if profits continue at a rate anywhere near 2022’s level. Using long-term average readings of the two, PANL is worth closer to $7 a share today. Using 8-year high numbers of 0.6x sales and 1.5x book value, the stock could be trading above $9 soon.

If downside potential in a worst-case scenario is -25% for a total return over the next 12 months vs. theoretical upside of +85%, reasonable investors should be contemplating the purchase of a position in Pangaea Logistics. That’s my bullish conclusion. I own a small stake in Pangaea Logistics Solutions, Ltd. and rate PANL a Buy .

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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