TK - Teekay Corporation: Record Margins Depressed Valuations And Price Momentum

2023-07-11 15:54:09 ET

Summary

• Teekay Corporation's net margin is at a record high since 2014 and its EV/EBITDA is 96% below its 2015 level, indicating strong financials and an attractive valuation for investors.
• The firm has been deleveraging since 2016, with net debt turning negative two quarters ago. Sales have been rising since FY2021, further strengthening its financial position.
• Teekay's low valuation multiples, plans for additional share buybacks, and the uptrend in its share price make it an attractive investment opportunity, especially as global fleet supply remains low.

Elevator Pitch

• Net margin (LTM) is at record high since at least 2014. The firm’s EV/EBITDA (annual) is sitting at 1.25 (96% below its 2015 level). Price is in an uptrend.

• The firm has been deleveraging; net debt turned negative two quarters ago for the first time since at least 2014. Sales (LTM) have been rising since FY2021.

• Macro tailwinds: the global fleet supply remains low, and Atlantic-Pacific movements are more common (thanks to a rise in Chinese imports).

Given the company’s low valuation multiples, strong financials, and plans for additional share buybacks, Teekay offers an attractive long opportunity for investors, especially while its share price maintains the uptrend that started around August 2022. Since oil-related equities are notoriously volatile and can enter persistent downtrends, applying a simple trend following approach to this stock may be a sensible strategy for investors.

About Teekay

Teekay Corporation (TK) operates a fleet of tankers that transport crude and refined oil products. As their 20-F explains:

Our primary business is to own and operate crude oil and refined product tankers…

… we employ a chartering strategy that seeks to capture upside opportunities in the tanker spot market while using fixed-rate time charters and full service lightering contracts to reduce downside risks.

…Spot market revenues may generate increased profit margins during times when tanker rates are increasing, while tankers operating under fixed-rate time charters generally provide more predictable cash flows without exposure to the variable expenses such as port charges and bunkers.

Their spot rate fleet (aka “voyage charters”) includes 44 vessels, while their fixed-rate (aka “time charters”) fleet includes just one vessel. Their spot rate fleet includes 18 Aframax-size tankers, 25 Suezmax tankers, and one VLCC (very large crude carrier); these can carry about 800k, 1m, and 2m barrels each, respectively. For the year ending in December 2022 Teekay received 97% of its revenues from the spot rate fleet.

Improving Financials

EBITDA and EBIT margins (LTM) are back into positive territory after plunging from Q2 2021 to Q1 2022. Net margin (LTM) is now at a record high since at least 2014, according to data from StockRow (see below).

Revenues and operating income over the last twelve months (LTM) have been in long-term downtrends since 2016, but both metrics have improved significantly since 2022. Operating income (LTM) turned positive two quarters ago, ending the six quarter streak of negative values. Net income (LTM) turned positive as well, after being negative for the majority of time since 2017.

Asset turnover (quarterly) rebounded significantly over the past six quarters and is now at a record high since at least 2014. Days payable has been falling since 2021 and is down 74% since that time. Shares outstanding have fallen for three quarters in a row, a marked contrast from the long-term equity dilution that has been taking place since 2014.

The firm has been deleveraging since 2016, and net debt actually turned negative two quarters ago for the first time since at least 2014.

Attractive Valuations

Valuation multiples are historically low. The firm’s P/B (quarterly) has fallen dramatically since 2015, staying below 1.0 since that time. It’s now at around 0.40, and interestingly has been increasing since the start of 2022 along with the price of the stock. Market sentiment appears to be rebounding.

The firm’s EV/EBITDA (annual) is sitting at 1.25, a 96% drop from its 2015 level of around 30.

Based on P/B, P/S, and EV/S, Teekay’s valuation is on average 45% below its industry median. Meanwhile, its profitability and efficiency metrics place it in the top 40% of its peer group (see below). Its 3-year revenue growth is lagging that of its peers; but as mentioned, much of the firm’s improvement in revenues and other metrics did not start until more recently, in 2022.

Potential Catalysts & Signs of Improvement

The spot tanker market is showing signs of improvement, as mentioned on the Q1 2023 earnings call :

• Spot tanker rates in Q1 2023 reached a record high (above levels in all other Q1 periods)

• U.S. gulf crude oil exports recently reached a record high; crude volumes out of Russia continue to be solid

• Global fleet supply remains low; the order book (as percentage of fleet) is at a record low

• Atlantic-to-Pacific long haul movements have been increased, likely due to the rise in Chinese oil imports and Russian exports

• Global demand for oil has been strong and is expected to rise by 2m barrels per day this year, in part due to China relaxing its COVID rules and increasing travel

In June of this year, the firm provided an update that said they have repurchased 10.7% of the common shares outstanding since the initial buyback program that started in August 2022. Since that time, shares have been repurchased for an average price of around $5.06. Teekay also explained it bought back another $4.4m of shares for around $5.67 per share on average. It has completed about 83% ($25m of $30m) of its total amount of planned buybacks. During the earnings call for the most recent quarter (Q1 2023), the firm said it started a $100m share repurchase program which gives them more capital allocation flexibility and allows them to take advantage of future market dislocations.

This shows an interest in reducing the number of common shares outstanding (which mitigates equity dilution) and shows that the company is confident in the value of shares even as the share price has been rising (close to $6.55 as of this writing).

Teekay’s financial strength has improved significantly enough for the firm to now focus on returning capital to equity investors. Just this Q1 2023, Teekay initiated a quarterly dividend of $0.25 per share, and the firm’s board recently approved a special dividend of $1 per share in response to strong financial performance in recent quarters and improved expectations.

In September of 2021, Teekay announced that it landed a new contract with the Australian Government Department of Defense to provide marine services for six years. The firm has the option to extend this contract for another ten years. Currently, the contract involves providing marine services for nine government vessels, and the firm expects to grow these services over time.

Russia’s invasion of Ukraine, in the company’s view , has caused persistent changes in the oil supply chain that benefit Teekay; mainly, mid-sized tanker voyages are now longer.

Risks

Teekay benefits from increases in the global demand for oil. China is one of the largest global economies, and if its economic recovery stalls or reverses, the country’s oil demand could drop and bring down the global average. Its decision to relax COVID-19 restrictions could, in theory, backfire and result in issues such as labor shortages, which reduce earnings.

The company notes in its 20-F filing that its business may be negatively impacted by public health threats like COVID-19. A recent presentation from the U.S. CDC stated that available research suggests Long covid, a potential outcome of COVID-19, is contributing to a labor shortage and is hurting the U.S. economy. Latest estimates from a meta-analysis and the CDC suggest that about 20% of Covid infections result in long Covid. The British Medical Journal (BMJ) found that nearly half of doctors affected by this condition can no longer work full time, and the CDC found that about 18% of people found to have long Covid do not return to full-time work.

Surprise oil production cuts are another potential headwind. The OPEC+ group recently announced a 1.16m barrel per day surprise cut , which will last until at least the end of 2023. Teekay believes this could reduce seaborne oil volumes.

More generally, if oil prices rise significantly for any reason, the demand for transporting it may drop. All else equal, this would mean tanker operators would likely need to lower the freight rates they offer in order to transact with customers and stay in business. Historically, oil prices have spiked in response to supply chain issues and/or geopolitical and economic fears , so those variables may hurt Teekay’s financial performance.

Execution

Buying a stock is a bet on where its price goes, not necessarily the fundamentals of the business. Since there is statistical evidence of trends in equity markets, investors who apply a scientific mindset should probably focus on companies that are in uptrends. Then, fundamental and macro factors can be additional requirements investors use to refine their screening process and further reduce risk.

Luckily, Teekay Corporation’s stock is continuing its uptrend after recently breaking out of its messy trading range that started in March 2023. And zooming out, the stock is still dramatically depressed from its 2011-2014 levels.

It may be sensible to consider a bet on this stock only while the uptrend remains in play, perhaps by requiring that a simple trend signal is active; for example, requiring that price be above its 180 or 200-day average. An investor may consider testing both and implementing whichever has stronger statistical evidence. This trend overlay may sacrifice some upside, but if there is evidence that it significantly reduces losses during adverse market events, it could still be the more rational choice based on available evidence.

Bottom Line

Teekay offers a historically low valuation, a trending stock price, record high profit margins, and a deleveraged balance sheet during an environment with multiple macro tailwinds. While its stock price continues to trend, the stock could be a reasonable bet for investors with a quantitative-inspired strategy to consider.

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