TRMD - Top Stock: The Buy Amid The TORM

2023-04-13 07:00:00 ET

Summary

• Fed Minutes bring up recession fears, but TORM plc remains a ‘Strong Buy’ and is currently ranked #1 in its sector and industry according to our quant ratings.
• Despite macroeconomic challenges, TORM, a leading specialist carrier of oil and gas, used them as an advantage, posting consecutive record-high Q3 and Q4 earnings.
• Sanctions on Russian diesel have served as a tailwind for fuel shipments transported on water, experiencing record volumes. OPEC’s production cuts may produce more tailwinds for any upcoming storms.
• Although the tanker industry is cyclical and highly volatile, according to our quant ratings, this Top-Rated Stock is collectively strong on value, growth, profitability, earnings revisions, and momentum.
• Reporting record full-year results and rapid growth resulting in the acquisition of seven tankers, geopolitical bans, and cuts on diesel have helped fuel shareholder dividends for this stock with a 15.30% dividend yield (TTM).

Tanker Stocks Are Not Ready to Tank: Strong Buy Opportunity

Global demand for crude oil is expected to rise following OPEC's surprise production cuts . "Saudi Arabia, the top producer in the group that includes Russia, will cut 500K barrels per day. The total new cuts are about 1.16 bpd, bringing total cuts including the previous 2M bpd to about 3.66M," an announcement that sent shock waves through the markets. Investors are worried about how the impacts could affect the Fed's fight to tame inflation. Will the cut to output complicate and increase the possibility of oil at $100/barrel to push inflation up?

March 2023 CPI Y/Y vs. Fed Target Rate

The latest CPI reading highlights some disinflation, with headline CPI falling to 5% year-over-year and Core CPI up 0.4% to 5.6% Y/Y. Given very large crude carriers ((VLCC)) experienced daily rates of more than $100,000 per day in March, Tanker TCE rates surged following OPEC's announcement, with cuts to oil production should see increases in demand for oil and gas products, especially amid the sanctions that have been imposed on Russian diesel, serving as tailwinds for my tanker stock pick, TORM. Oil futures are already on an uptick, reflecting contracts tied to deliveries as far out 2025. Fuel consumption is expected to increase through 2024, according to the U.S. Energy Information Administration ((EIA)).

Because freight rates can ultimately be passed onto consumers, TORM may sail into the sunset! When supplies are reduced without a change in demand, prices go up. Fortunately, with TORM's record high EBITDA and discounted valuation, there is plenty of room for upside, as highlighted by the forecasts below.

Daily Demand for Crude Oil, with forecast until 2026 (in millions of bpd)

On the heels of these forecasts, banks like Goldman Sachs and JPMorgan raised their oil price forecasts on the heels of expected tighter supplies and hotter demand. With seasonal peaks occurring in the summer, bullish investors awaiting a rally could benefit from the macroeconomic environment, especially if considering a fundamentally solid tanker company possessing Strong Buy quant ratings. Consider my Top Rated Stock (as of 4/12/23), TORM plc, for a portfolio.

TORM plc ( TRMD )

• Market Capitalization: $2.52B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 4/12): 1 out of 248

• Quant Industry Ranking (as of 4/12): 1 out of 61

London-based tanker company TORM plc is a global leader in refined and crude oil transportation. Boasting efficient, safe, and reliable storage and shipping, TORM's strong financials, discounted valuation, and low debt offers a margin of safety in a highly cyclical industry. Tanker rates over the past six months have experienced increases, boosted by OPEC's production cuts taking place in May, and sanctions on Russian oil favoring tanker companies like TORM, set to benefit from higher demand for crude oil and products. TORM plc Chief Executive Officer Jacob Meldgaard said it best during the Q4 Earnings Call :

"We have seen strong improvements in product tanker rates. Increased trade flows, longer trade distances partly due to the EU sanctions on Russia and partly due to more fundamental factors such as oil demand recovery, recent refinery closures, and consequently increased import needs. This has all moved the product tanker fleet closer to the point of full utilization, which has also led to higher freight rates."

Given its extremely discounted valuation and bullish momentum, consider TORM an opportunity for significant upside.

TORM Stock Valuation & Momentum

Energy companies can experience volatile swings, and even with the drop in oil and gas prices over the last year, TRMD has maintained bullish momentum .

On an uptrend over the last year, TRMD's six-month price performance is 3,070% better than its sector peers, and a continued quarterly price performance uptrend from three-months at 10.36% to a one-year of 222.56%.

TORM also comes at a solid discount. Highlighted by an A+ valuation grade, its trailing P/E ratio of 4.45x versus the sector's 7.61x, along with EV/EBIT ((FWD)), are both more than a +40% difference. Although the company is approaching its 52-week high of $36.60/share, its record-high $267M EBITDA for the fourth quarter to bring its full-year to $743M, outperforming its prior four years combined substantiates its discounted valuation and leaves room for upside.

TORM Stock Growth & Profitability

The War in Ukraine has greatly impacted European energy. As conflicts with the U.S. and OPEC, along with Russia-Ukraine drive the reordering of refined products, ton-mile demand is increasing rates, which benefits the tankers. Refinery closures are adding to ton-mile demand around the globe, resulting in an increased need for tanker fleets.

Trade recalibration is increasing ton-miles

For the full year in 2022, the TCE rate averaged $34,154 per day, according to TORM. TCE rates in the fourth quarter of 2022 ended at $47,520 per day and are expected to rise. TORM already has strong financials, and with consecutive top-and-bottom-line earnings, beats are committed to acquiring more tankers after the acquisition of seven LR1 tankers in Q4.

With a fourth-quarter EPS of $4.45, which beat by $1.63, and revenue of $444.40M beating by more than 135%, TORM posted the strongest results for the second quarter in a row. Despite inconsistent dividend payouts, TORM has a substantial 15.30% ((TTM)) dividend yield and a 197% five-year dividend growth rate to help. As the Fed weighs in on the banking crisis tilting the U.S. economy into a recession , high dividend-yielding stocks like TORM can help mull the blow to portfolios. TORM's Board of Directors approved a $2.59/share dividend for a total 2022 distribution of $378M. Given the nature of this highly cyclical industry and the potential for a recession, it is crucial to take note of TORM's tremendous fundamentals, quant ratings, and factor grades before I dive into the risks.

TORM Factor Grades

A review of TORM plc's Factor Grades above, which rate investment characteristics on a sector-relative basis, paints a picture of this high-quality stock. Higher-quality companies that offer dividends can serve as a hedge against inflation and potential downturn. Although TORM reaches outside the traditional high-yielding stock parameters that include a combination of growth, capital appreciation potential, and dividend safety, TORM continues to generate income for its shareholders despite economic challenges and risks.

Risks to Investing in Tanker Stocks

The tanker industry is highly volatile and cyclical, particularly in oil and gas, even though they benefit in good times and pay some of the highest dividends, as highlighted above. As showcased in TORM's financials, peak profitability, and growth are great for portfolios. However, if we see a trend reversal in the event of a recession, decreases in crude oil or ton-mile demand, or any pitfall can spell trouble.

Given the industry, ESG risks are always present. Although the Russia-Ukraine conflict has been positive, resulting in favorable economics, growth, and strong financials for TORM, the shift to clean energy can be an expensive fleet investment. Europe has been focused on reducing its dependence on Russian natural gas, and TORM is dedicated to being environmentally conscious. In the shift towards liquefied natural gas ((LNG)), "clean tankers" are more expensive than dirty tankers. While this sort of investment will not occur immediately but is anticipated in 2025, TORM stands to benefit, given its energy-efficient focus, as it looks to the future.

Conclusion

Although the economic outlook is uncertain, recession and geopolitical risks may pose headwinds, tanker companies like TORM with fleet quality are taking advantage of surging oil prices and demand. Over the last year, TRMD has been up more than 220%. TORM's favorable outlook on the heels of excellent financials and demand has allowed it to trade at above-average volumes, and investors continue to bid up shares.

Despite OPEC+ production cuts and a persisting war, TORM, a specialist transporter of energy and clean petroleum product transporter delivered record earnings over two quarters. Consider TORM, my top-rated overall stock, and the Top Oil and Gas Storage and Transportation stock. Its strong fundamentals, a 197% five-year dividend growth rate, and bullish momentum offer a favorable outlook that could benefit whether economies do or do not experience a recession in 2023.

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