2023-06-20 15:11:46 ET
Summary
- Global oil demand is expected to rise, potentially boosting seaborne crude trading volumes.
- Navios Maritime Partners (NMM) has a low valuation but a risky chart, leading me issue to a hold rating on the stock.
- NMM is at a critical juncture on the chart, with bearish risks potentially affecting its future performance.
- I highlight key price levels to monitor.
Global oil demand is seen as rising in the coming years after a protracted period of stagnation. According to IEA estimates as of May 2023 and a recent EIA short-term energy outlook, demand may jump from about 100.5 million barrels per day from Q1 this year to better than 103 mb/d at year-end. What's more, a depleted US strategic petroleum reserve will need replenishment before long, potentially boosting demand in out years. That should help support seaborne crude trading volumes.
Amid this decent macro backdrop, Navios Maritime Partners (NMM) features a low valuation but risky chart. I have a hold on the stock given the mixed situation.
Growing Global Oil Demand
Navios Q1 Report
According to CFRA Research, NMM owns and operates dry cargo vessels in Asia, Europe, North America, and Australia. The company offers seaborne transportation services for a range of liquid and dry cargo commodities, including crude oil, refined petroleum, chemicals, iron ore, coal, grain, fertilizer, and containers, and it charters its vessels under short, medium, and longer-term charters.
The Monaco-based $641 million market cap Marine Transportation industry company within the Industrials sector trades at a low 1.1 trailing 12-month GAAP price-to-earnings ratio and pays a small 1.0% dividend yield, according to The Wall Street Journal.
Back in May, NMM reported a strong bottom-line beat. First-quarter operating EPS verified at $2.13, topping estimates of just $1.83. Revenue surged better than 30% YoY and leverage dropped sequentially in the quarter, according to the CEO , from 45% to 42% on a net LTV basis. The long-term goal is to bring leverage into the low-20% area. No new vessels were purchased in the quarter, helping to bring down the percentage. Now trading at about a quarter of book value, the company seems like a steal of a deal, but it is key to realize that the industry is very volatile, and we are coming off a period of massive profits in the space.
$3.4 Billion Of Contracted Revenue Through 2036
On valuation , CFRA data notes that Q2 earnings are expected to have fallen by more than 20% from the same period a year ago while 2023 and 2024 EPS should hover just shy of $13. Operating margins are strong right now and the firm is enjoying robust profitability and high cash flow.
Navios: Earnings, Sales Outlooks & Key Profitability Ratios
On an EV/EBITDA basis, shares trade at a steep 29% discount to its long-term average multiple, implying a fair price near $30. I also like to look at the price-to-sales ratio given the earnings volatility and the current period of abnormally strong per-share profits. If we apply a normal P/S, then the stock should be just shy of $40. Combining the two and discounting it by a 30% margin of safety, I see a fair price near $25. So, it's a decent buy on valuation even when considering the high-risk niche.
NMM: Strong Cyclical Earnings Result In Attractive Valuation Metrics
Seeking Alpha
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Thursday, July 27 BMO. The calendar is light on volatility catalysts aside from the reporting date.
Corporate Event Calendar
The Technical Take
NMM is at a critical juncture on the chart. Notice in the graph below that shares are flirting with multi-year lows under the $20 mark. After probing support late last month, NMM is once again dipping dangerously close to falling under the $20 spot. With a falling 200-day moving average, and as shares are about 20% under that line, the bears are clearly in control. Moreover, take a look at the RSI momentum reading at the top of the chart - it is in the bearish 20 to 60 zone.
That's further evidence that more bad price action is on the way. I suppose a long play with a stop under $19 could work, but with a repeated test of support, the chance of a big breakdown is growing. I would avoid the stock due to these factors. And even if we get a rally, there is a high amount of volume by price as measured by the horizontal bars on the left side of the graph - so selling pressure may emerge on a jump to the $24 to $30 area.
NMM: Probing Key Long-Term Support, Bearish RSI & Moving Average Trends
The Bottom Line
I like how cheap Navios appears, but the technical situation is precarious. I must respect the bearish risks I see on the chart, so I have a hold on NMM ahead of its Q2 earnings in July.
For further details see:
Navios Maritime: Shares Undervalued While Earnings Growth Ebbs, Technical Risks Ahead