Transportation and logistics sector review

Transportation and logistics sector review

Recently I had been asked about my personal thoughts on the logistics sector as a whole. Having looked at the sector before I find a short writeup lacking so here’s a more detailed overview regarding the entire sector. The focus here today will be on shipping but I will highlight trends in other segments of the supply chain as well.

Market overview

Logistics is a broader term for the part of the supply chain related to transporting and storing goods. Companies operating in this space are constantly seeing new challenges and finding new solutions to enable greater utility from their operating models.

In figure 1 we can see that overall this sector is very fragmented, while some big players exist in well sized segments as rail, sea freight and postal overall the market is not top heavy.

Figure 1: Illustration by BCG on fragmentation of the overall sector

The market is not only fragmented by segment but also geographically, see figure 2 for an indication.

Figure 2: Illustration by Mordor Intelligence on the geographical distribution of the overall sector

Looking at the end market also gives us a similar picture of a fragmented client base, see figure 3:

Figure 3: Illustration by Mordor Intelligence on the geographical distribution of the overall sector

So in essence the logistics market is fragmented on the demand supply and demand sides without being restricted to a certain region. Everyone needs these services as these companies form the arteries of the global economy.

Market trends

Since covid-19 hit the world supply chains have become increasingly prone to disruption. The demand hit in 2020 suddenly created storage issues in both commodities (notably crude oil) and other goods. It can be seen that this seeped through overall logistics. The increased unpredictability in demand seemingly created medium term effects in most supply chains in relation to storage levels and rates for transportation as overall demand started to reduce.

As an example I take a look at the baltic dry which took a hit bringing it lower than the levels after the 2018/2019 tarif war. The index represents the price of moving major raw materials by sea. Lower levels are good for the ones shipping but normally indicate lower or slower economic activity. Higher rates are generally accompanied by increased economic growth. It is interesting to see how the 2020-2022 average is similar to the end of 2019 by index levels but with the greater ups and downs.

Figure 4: Baltic dry Index

One would expect in such a dynamic environment that the larger players would be able to take market share by acquisitions or just general financial flexibility but it is interesting to see that in many segments fragmentation is increasing leading to a more competitive, and apparently more flexible environment.

Figure 5: Illustration by BCG on trends in fragmentation of the overall sector

I am writing this short industry review from an investors perspective, and thus I am more inclined to look at places where the barrier to entry is larger among other factors cementing certain players in place. I will look further into shipping as I believe those factors to be more present than in for example road freight due to the smaller number of players. Postal and rail would warrant a separate review.


Publicly listed companies in this sector that I will glance over will be:

Maersk, Hapag-Lloyd, Zim, DHT, Euronav, Frontline, Scorpio Tankers, Nordic American Tankers and Star Bulk Carriers.

These companies form the backbone of the maritime transportation sector and competition would require large capital investments in combination with client trust. Overall certain industry trends will impact the bottom lines of these companies. Most of these stem from the disruptions caused by Covid-19 to increase in transportation costs (fuel) but even more unpredictable de-globalization patterns. The UNCTAD noted in their 2021 Maritime transport review (see source 6) that the entire sector’s volumes are expected to grow 2.4% annually.

These companies however are super dependent on developing countries (see figure 6,7,8) which is a risk one should take into account before researching individual players further. I will first look at the overall industry before moving on to individual cases as understanding the operating environment is key to understanding the companies active in such an environment.

Developing markets overall dominate the exposure of these companies but it is important to note that certain goods are loaded and discharged more by developed or developing economies than others. See figure 8.

Figure 6: UNCTAD report on historical volume market share by developing countries

Figure 7: UNCTAD report on continent share of maritime trade

Figure 8: UNCTAD report on share of different goods

The companies I selected are mainly related to tankers, containers and bulk as those sections make up most of the recent maritime trade. It’s interesting to note the growth in container and main bulk since the 2000’s as tankers, which dominated before 2000 have been stagnating in loaded tons. See figure 9.

Figure 9: Cargo types

The ships themselves are getting bigger although with less replacement the overall age is increasing according to UNCTAD.

Figure 10: Ship age

And finally before I move onto individual names I must note how supply, demand and the related price have moved over the last couple years (the report being from 2021 it doesn’t have all data from 2021).

We can see that the industry experiences large swings in demand just like any other sector. Shipping is certainly not isolated from global recessions and the entire sector does depend on additional demand from ‘regular’ years to be very affected by such events. As we could also see in figure 4 prices also follow supply and demand closely and without much delay. The sector does not seem to have any pricing power outside of large demand and supply mismatches which do occur every so often in both directions.

It is to be seen how the future bodes but as supply in this sector is relatively stable and not easily changed I would be cautious of large oversupply of shipping in this sector due to demand drops.

Figure 11: Demand and supply

While the focus of this short industry review is more at the overall industry I will quickly glance over a couple of individual names to give some quick thoughts from a valuation perspective.

Crude Tankers:
DHT - crude oil tankers

DHT has a fleet of 26 crude carriers and is trading shy of 1B dollars. It has benefited from hikes in rates in 2020 and but as rates have normalized the stock has stagnated. With an overall expected decline in oil volumes over the next decades the long term outlook of this company is not very different from any other oil midstream company.

Euronav - crude transport and storage

Euronav in comparison to DHT is slightly more diversified as it also offers storage among some other services. It also trades at almost twice the market cap of DHT. While DHT has stagnated since 2020 Euronav has managed to grow slightly. Multiple wise the company seems quite expensive trading at a forward P/E of 28x (according to Koyfin). That in a low growth sector seems quite expensive.

Scorpio Tankers - refined petroleum products

Scorpio transports refined petroleum products, its share price has been on a continuous decline ever since it was listed. It has stagnated aside from an uptick in 2020 with large losses in 2021 and 2018. Such a cyclical company trading at a forward P/E of 5x is unsurprising.

Nordic American Tankers - crude oil tankers

NAT operates a fleet of 24 cruce oil tankers and it has been on a steady decline since 2004 with a couple of upticks every now and then. The cyclicality is not something I like especially with flat/declining revenues for the last decade.

Frontline - crude and oil products

Frontline operates a 70 vessel large fleet. The company has stagnated since the GFC and aside from slight tailwinds in 2015 and 2020 the company has performed really badly on a fundamental basis. There’s also no real expectation of any change in that regard as the overall sector has been struggling.

Containers and dry bulk:

Dry bulk and container shipping is seeing significant tailwinds as of now. Unlike crude tankers these companies are trading at higher multiples and high trailing yields. Expectation for the entire industry are not as positive however.

Maersk - container shipping, freight forwarding, terminals

Maersk is one of the biggest players in this field as it offers container shipping, terminal handling, container storage, sea and air freight forwarding, towage and terminal services among other products.

From a surface level the fundamentals seem astounding as the company boasts a forward and trailing P/E of around 2x. But for the future I would be careful as this company might end up having significant earnings volatility, most likely downwards, in the near future leading to a much higher multiple.

An IV projection by StarMine gives a similar image but taking into account significantly lower earnings in the next few years the company does not seem as cheap as one would imagine.

Figure 12: Refinitiv Eikon StarMine projection on Maersk

Hapag-Lloyd - container transport

Hapag operates container fleets used for general and special cargo, inland container transportation (trucks and trains) while also providing data services.

Again, just like its competitors Zim and Maersk the company appears to trade extremely cheap at a trailing P/E of 3.6x, the IV projection by StarMine gives the same idea. Again I would be cautious about a return to normal shipping rates which would leave this company at a whole different valuation.

Figure 13: Refinitiv Eikon StarMine projection on Hapag-Lloyd

Zim - dry cargo and services

Zim Integrated Shipping Services provides container shipping and dry cargo. Zim is very known among dividend chasers as it had paid a large special dividend of $17 total in March this year. This company faces the same issues as Mearks and Hapag as earnings are expected to drop significantly once shipping rates normalize. The 27% forward dividend yield shows that investors do not have a lot of confidence in this company being able to continually keep their heightened cash flows.

Star Bulk Carriers - dry bulk cargo

Star is specialized in dry bulk cargo of major commodities. Again this company seems to be relatively cheap when looking in the hindsight mirror spotting a 25% trailing yield with a P/E of 3x. With an expected earnings drop the company suddenly does not seem as cheap.

Overall the companies who handle containers and dry bulk seem to be in similar spots, they had a great year but the future is uncertain and most likely will include significantly lower profits. These companies have however been able to clean up their balance sheets and invest more due to the large cash influx which might earn them a higher multiple than pre covid. This would be a similar fate to what happened to the crude tankers in 2020.

The future

An interesting look at how the logistics environment will change over the next few years is provided by PWC (see sources).

Multiple scenarios are presented:

Figure 14: PWC scenario 1.

Figure 15: PWC scenario 2.

Figure 16: PWC scenario 3.

Figure 17: PWC scenario 4.

While it is almost certain that a combination of one or more of the above scenarios will play out in some way it is very difficult to pick any sub industry as the uncertainty is too high. Tailwinds will be experienced by some players but it is to be seen who these players are and if they will only innovate or innovate and increase their bottom line with it.

My overall personal conclusion is to stay away from shipping as the competitive advantage of companies in this subsector is not strong enough to explain the high multiples and high uncertainty regarding future cash flows.

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Wow thank you so much for sharing this with us.

Really appreciate - The amount of time and effort you have put it

Have a fab week