2023-08-11 07:34:13 ET
Summary
- Maersk has shown relatively flat trends due to high valuations and expectations, leading to negative analyst coverage.
- Despite a downturn in shipping rates, Maersk delivered solid quarterly revenues and maintained guidance for the full year.
- The company's other segments, such as Logistics & Service, are delivering good results, and Maersk is expected to see improvements in the second half of 2023.
Dear readers/followers,
Maersk (AMKBY) is a company I've been covering - and am still profitable on, for some time now, even if my position is not yet substantial. I missed out on most of the absolutely massive climb in conjunction with COVID-19 and the logistical crisis but entered at a nonetheless appealing share price.
Since then, the company has shown relatively flat trends, owing not to negative trends, but to high valuations and high expectations.
This trend has seen some analysts and official coverage of Maersk come in negative with "SELL" ratings. The main trend that's driving sentiment here seems to be the picture for the overall long-term development of company freight rates. Maersk management has stated that the downturn we saw was mostly due to destocking - not a fundamental downturn or reversal.
Some analysts take a different tact and view this as a marked downturn or the beginning of a negative cyclical trend that would send the company down significantly.
I believe the truth is somewhere in between, and remain positive on the company for the reasons I will explain to you here.
We have 2Q23 here, so I'm updating my thesis.
Maersk - The upside is substantial over the long term, despite the downturn in shipping rates
As we saw in 1Q23 and 2Q23, we saw a near-double-digit volume decline in shipping volumes , with a significant decline in freight rates as a product of dropping demand. The company still delivered quarterly revenues of over $14B, with a solid ongoing EBIT margin of over 12-16%, while managing cost increases and other headwinds.
It's this headwind environment I want to clarify - because there is currently a substantial headwind in shipping. Still, Maersk nonetheless maintained its guidance for the full year, with improvement expected in 2H23. That's in 3Q, not in 2Q - which makes the 2Q period indicative at best, but not to be overstated, in my view.
In fact, if we see a substantial sell-off of Maersk shares, I would argue such a sell-off based on 2Q results would mark a very good investment opportunity if nothing else material changes in the company.
Analysts characterizing this normalization trend as severe oftentimes fail to mention that the Ocean normalization was something forecasted very clearly by Maersk. They also, often fail to mention that as of the last quarterly report, the contract season for ocean freight is actually proceeding within the framework of normal expectations, with over 3/4th of the contract volume on an annual basis already signed.
Maersk IR (Maersk IR)
While contract rates are indeed moving toward spot price levels, these levels are still seeing some premiumization, and you can see on the above expectation that the company actually expects more or less flat development on a YoY basis. Based on where these trends are on a 20-year period, such a set of results would be superb. That's also why, since May, we've actually seen double-digit outperformance of the company.
Since mid-May of this year, Maersk is up double digits, significantly outperforming the S&P500 in the same timeframe.
The company's other segments are also delivering good results, despite destocking trends. Logistics & Service, another billion-dollar segment saw top-line quarterly growth of above 20%, as Maersk works to consolidate what M&A's it has.
The inventory correction/destocking is also a very real thing - both in EMEA and NA and especially on the overall retail side. That will likely linger until at least 3Q23, when I would agree with management guidance.
Then we have the terminals segment, the usual "odd man out" for this business, at least how I see it.
Maersk IR (Maersk IR)
Since the Russian invasion of Ukraine, the company has seen a substantial downturn, especially given the impairments, but also due to a significant volume headwind in NA. The company has nonetheless managed strong cost control, and the "jaws" you can see here in this graph illustrate just how strictly Maersk has managed to keep things in line despite substantially lower revenue. Many characterize the ocean freight segment as the thing they're worried about or look at - I actually tend to look more at the terminal segment, despite the comparatively minor revenue trends here.
It's equally important to point out that the company is actually delivering on its high-level roadmap targets. Every single one of the estimates and targets is currently being either met or close to it. Logistics & Service EBIT is the only issue, and I expect improvements here.
2023 is the year when Maersk is expecting Logistics and Services to bring about better profitability as well as growth, taking away some of the cyclicality and volatility of Ocean. I'm not arguing that Ocean will see significant margin normalization over time - but the company has over the past 24 months received enough capital inflow from various sources to not only optimize current but to grow operations where I don't believe the Maersk we see in 3-5 years will be the Maersk we had Pre-Covid. Their margins are likely to be substantially better, and their stability is likely, as I see it, to be massively improved as well.
The high-level expectations are that the inventory correction will be completed by 3Q23, which will lead to slight improvements. GDP is continuing to have an adverse effect on the company's growth, with muted growth rates leading to shipping softness - but APMM is still expected to grow in line with market trends, which currently translates to flat development.
The company's forecasts of full-year EBITDA of upwards of $11B and EBIT of around $5B on the high point, with FCF at least at $2B still leaves room for optimism in the current share price. More importantly, no negative increases in CapEx are being expected here, and much of the expected impairment and restructuring costs for APMM have already been recognized, with less than $100M remaining going into 2Q23.
Sector-specific trends call for improvements, or stabilization in all contexts. I understand and recognize that Ocean is the by far most important segment here, but I do believe realistically that analysts are, some of them, being too negative on the potential for a shipping downturn. The cadence of these trends is longer than you may expect, and I believe management has decent visibility for 2H23, especially given the contract fill rate that we're already seeing on the Ocean side.
What I would be on the lookout for, aside from sudden downturns and unwelcome surprises in Ocean, is 3Q23. This quarter is important as the seasonal and management implication is that this will be a strong quarter for Ocean compared to 4Q. If it's not, then we can start talking about impairing the valuation further.
Another way to view this, and I would agree with this, is that 4Q will be weak. Not only that, but it's likely, given capacity additions and normalization, that going into 2024E, we'll see a few weak quarters comparatively from Ocean as well. However, I don't see it as negative because Maersk is doing such a good job containing costs - and I want to see rate contract negotiations turn out before I give you my final take on the environment on a forward basis.
Let's move on to the valuation of the company, and why I remain positive on Maersk despite this market outlook.
Maersk - Fundamentals and safety make up for temporary downturns and volatility
Since my December article, which is when I really went deeper into the business, the company has significantly outperformed the market, meaning S&P500. Maersk has returned 19.75% inclusive of dividends, making it a solid choice. Some believe the company's upside is now over. I would beg to differ here.
The company cannot rightly, based on the expected normalization, be called "cheap" any longer. But cheap has never been a deal breaker for me with this business. I just want a good valuation.
It is my stance that while normalization is coming, and this will likely trough in 2024E, we'll see stabilization and the rise of a new Maersk going into 2025E that's far more resilient and stable than how it's been in terms of its legacy. You're also, in my view, protected for uncertainty and the worst of volatility simply based on the fact that you're investing in one of the primary enablers of logistics on the Ocean in the world. Maersk has a 220B+ DKK market cap, and it has almost no debt at 16.8% to capital. It has a debt/equity of 1.19x, which in shipping puts it in the 70th percentile to peers (Source: GuruFocus). We could talk about margins, but the historicals are not really indicative here, with gross margins at 97.3% and net margins of almost 30%. Still, even if we see a massive margin compression on a comparative basis, which we are likely to, I want to state clearly that the company has a working and profitable business model and contrary to many analysts, actually has a decent deal of pricing and negotiating power. That's why I'll keep a close eye on the contract negotiations.
I view any material downturn, especially below the 10k DKK level for the native share, as significantly attractive. If we see a reaction from beyond the next/this quarter, unless something appears that causes me to give an edit to this article, I will be loading up on Maersk for the long haul. This is one of those companies that you can "ride" in long cycles.
S&P Global targets are still well above 18,000 DKK/share. 16 analysts follow the company, their average meaning that 8 analysts, despite the current earnings and cadence uncertainty, are still at a "BUY" (down from around 13 at its high point in appeal).
I would be careful considering this company negatively, as it has the very real potential for a long-term upswing. Remember, we do have 2Q23 results - and far from the expectation analysts seem to have had going into 1Q or the second half of the calendar year, these results were in no way bad. Management was in fact fairly spot only. As management stated in its commentary:
The volume and rate environment has developed as anticipated, with inventory destocking continuing to be the primary driver for lower volumes, which could be felt in the performance of all our segments. A strong cost focus in Ocean and Terminal, in particular, cushioned the top line impact and supported our bottom line performance.
(Source: Vincent Clerc, 2Q23 Maersk Earnings Call)
So the impression that analysts in terms of their forecasts were wrong, that impression has turned out to be incorrect. While the cadence for Logistics/services was not exactly up to par, it wasn't far off - the 2Q was in line with expectations, which the market was essentially, to a large part, not expecting.
While the reduction in full-year guidance for container volume does mean that compared to previous guidance we're looking at around 50 bps lower on the high side, this has no impact whatsoever on the higher-level margin and 2025E targets, which is why I give this almost no importance. Another, perhaps more important portion here is the increase in full-year financial guidance.
With this guidance increase, I believe the bears on this company have overestimated the impact to Maersk, and I stay positive with the following thesis for the company.
Thesis
- This is one of the world's most important shipping companies. At a good valuation, this company is, to me, a no-nonsense "BUY" with no looking back. The flow of goods dictates the state of our national economies, which makes the company a major player in macro.
- I view the company currently as fairly or even slightly undervalued in the face of what is an unprecedented logistic crisis.
- It's a "BUY" here to me - and I view it with a target of 16,000 DKK/share updated for August of 2023.
- I recently bought more in the company.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them:
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
The company, therefore, fulfills all of my investment criteria here except it no longer really being "cheap" here.
For further details see:
Maersk: Things Are Far From Bad, I Share Management Optimism