STNG - Scorpio Tankers: A Solid Q3 Rising Yield And Positive Technicals

2023-11-14 23:44:25 ET

Summary

• Global shipping stocks have underperformed the S&P 500 this year, including the SonicShares Global Shipping ETF.
• Scorpio Tankers is undervalued and has strong technical and momentum indicators following a solid Q3 earnings report.
• The company's earnings, valuation, dividend yield, and free cash flow forecasts make it an appealing investment option.

Global shipping stocks have bounced around so far this year. The SonicShares Global Shipping ETF (BOAT) is up 13% on a total return basis in 2023, but that is modestly underperforming the S&P 500. Following high industry rates in 2022, there have been important changes among some of the major players in the space.

I reiterate my buy rating on Scorpio Tankers (STNG). I see shares undervalued while the technical and momentum pictures are strong following a solid Q3 earnings report issued earlier this month.

Shipping Equities Up, But Underperforming this Year

According to Bank of America Global Research, Scorpio Tankers provides seaborne transport of refined petroleum products worldwide, such as gasoline, heating oil, and fuel oil. Product tankers move refined products from global refineries to points near consuming markets. STNG operates the world's largest, youngest, and most modern fleet of publicly traded product tankers consisting of 112 owned product tankers. STNG largely operates in the spot shipping markets.

The Monaco-based $2.9 billion market cap Oil and Gas Storage and Transportation industry company within the Energy sector trades at a low 4.8 trailing 12-month GAAP price-to-earnings ratio and it pays an above-market 2.4% forward dividend yield. Following a strong Q3 report, shares trade with a still-lofty 37% implied volatility percentage while short interest on the stock is notable at 4.1% as of November 13, 2023.

Earlier this month, Scorpio reported very solid Q3 results. Non-GAAP EPS verified at $1.91, beating estimates by $0.41 while quarter revenue fell 41% year-on-year to $291 million, but that was materially better than what analysts had expected. Also encouraging was a key signal from its management team – the quarterly cash dividend was raised to $0.35 per share, up from $0.25, and Scorpio’s Board of Directors confirmed an aggregate $250 million share repurchase program.

Higher-than-expected time-charter equivalent (TCE) rates and positive operating leverage drove the robust numbers and positive outlook despite a YoY dip in TCE rates. The firm now expects a seasonal lift to operating results heading into the winter following its first sequential TCE rate rise in three quarters.

The focus is also on financial engineering to reduce debt and reward shareholders with dividends and buybacks – those are positive factors. Still, weaker global shipping rates could pressure profits in the coming years. Another key risk is how the firm manages its operating expenses over the coming periods.

Scorpio Tankers' Average TCE rates

On valuation , analysts at BofA see earnings falling by about 5% this year, and per-share profits are expected to continue to trend lower in the out years. The consensus outlook currently reveals EPS above $10 this year and next, but 2025 FY EPS is seen under $9, according to Seeking Alpha.

With mid-single digit P/E ratios looking ahead to 2024, the valuation is not exceedingly high. Moreover, a rising yield and buyback plan support the long case. Finally, free cash flow is stout – even using 2025 numbers, STNG trades about 5x FCF while its EV/EBITDA ratio is significantly below the S&P 500’s average.

Scorpio Tankers: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

If we assume a 6x EV/EBITDA multiple, on the low end of the company’s historical range, then the stock is a bit more than 20% undervalued with its $57 share price today. Moreover, if we assume an 8x operating P/E on $9 of normalized earnings, then the stock should be in the low $70s. An 8x P/E is below that of the sector, as well. Overall, the valuation metrics appear appealing.

STNG: Compelling Valuation Metrics

Compared to its peers, Scorpio features some of the best Factor Grades you’ll come across. I see the valuation as rather compelling, though forward EPS growth will be less impressive. Still, with high FCF and a solid set of Q3 results, profitability is robust and its share-price momentum reading is positive. I will detail that later on. Finally, there has been a slew of analysts upgrades of STNG’s earnings lately, making for positive headline risk/potential.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2023 earnings date of Thursday, February 15 BMO. Before that, shares trade ex a $0.35 dividend on Wednesday, November 29. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

I last covered Scorpio in September of 2022. I noted that a measured move price target toward $63 was in play based on a key chart pattern. That took a while to play out but notice in the chart below that shares indeed rose right to that spot, peaking at $64 earlier this year. Following a significant pullback into the low $40, this Energy transport name has rebounded with enthusiasm. Take a look at the uptrend support line in green below – that indicates support may be seen in the low $50s. There’s confluence there, too, as the long-term 200-day moving average is turning positively sloped while the near-term 50dma indicates the trend is indeed with the bulls as we progress through Q4.

A cautionary signal is seen in the RSI momentum indicator at the top of the graph. As STNG has moved higher in its share price, momentum has slowed – that is a modestly negative divergence in the eyes of a technician. Longer-term, I see resistance at the February high near $64 while another layer of possible support is apparent in the $47 to $48 zone.

Overall, long with a stop under $46 appears as a decent risk/reward play. A more conservative strategy could be to place a sell stop under the $51 mark.

STNG: Bullish Uptrend, Eyeing the 2022 Peak

The Bottom Line

I am bullish on STNG. I see shares as moderately undervalued, and the stock price chart and trend appear favorable despite lower earnings expectations looking out over the coming quarters.

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