Last Thursday, I returned home from my semester abroad in Vienna, Austria. After four months of heavy weekend travel accompanied by a below average workload, I had the opportunity to experience more cities and meet more people than I thought was possible in a post-covid world. In my travels, I became fascinated with the various industries that drive different nations’ economies. During a weekend in late November, I had a nine euro flight to Oslo, Norway. On my first day, I went on a city tour and learned about Norway’s most essential trades: ocean transportation (shipping), oil, and fishing.
As consistent readers of achaion.com may know, I conduct screens for Warrior Stocks, companies shrouded in pessimism, on a regular basis. In parallel to my trip to Oslo, ocean transportation companies were constantly popping up across my screens. Before Norway, I found those companies unappealing because their financial statements were all very similar: negative income until 2021, consistently positive cash flow, abnormally beefy dividends, and attractive debt balances. From the looks of it, I had a feeling that these companies were value traps that finally made money in 2021.
After Oslo, I decided to revisit the maritime industry because of its importance in the Norwegian economy, but I expanded my search to look for companies trading at a higher premium. Matson, Inc (MATX) has now been on my mind for several months because of its unique expedited shipping business model, necessity to its consumers, and growth prospects in the short and long term. However, I hesitated to write it up with looming recessionary conditions, insider stock liquidation, and extremely compressed valuations present.
Matson, Inc. (MATX)
Key Financials (as of 1/05/2023)
- Market Cap: $2,439.8 mm
- Enterprise Value: $2,715.6 mm
- P/BV: 1.04x
- EV/EBITDA: 1.3x
- Current Stock Price: $61.90
Matson, Inc (“Matson” or “the Company”) was founded in 1882 and is headquartered in Honolulu, Hawaii. In June 2012, the Company changed its name from Alexander & Baldwin Holdings, Inc to Matson, Inc.
Matson provides a variety of ocean transportation and logistic services to Hawaii, Guam, Alaska, and other island economies in Micronesia. The Company primarily ships dry containers with mixed commodities, refrigerated commodities, packaged food and beverages, building materials, automobiles, household goods, livestock, seafood, general sustenance cargo, garments, footwear, e-commerce and other retail merchandise. In addition, the Company assists various islands in the South Pacific and Japan’s Okinawa in container stevedoring (physical handling of cargo from vessel to off-vessel), refrigerated cargo services, and inland transportation.
The logistics segment provides multimodal transportation brokerage, domestic and international rail intermodal, long haul and regional trucking, and additional supply chain related services.
Matson’s tankers are the fastest in the ocean, fall in line with carbon emission and scrubbing standards, and ship products to islands that are dependent on the Company’s services.
Recent Performance
During 2021, the Company took advantage of the struggling global supply chain and grew its revenue, gross margins, and returns on capital dramatically. Matson developed super expedited shipping routes for clients that were willing to pay more for faster deliveries amidst significant port blockages. Revenue grew by 65% year-over-year in 2021, gross margins increased by 15%, and return on capital expanded by 22%. In March 2022, MATX peaked at $125 per share in response to the success of its advantageous adaptation to the supply chain situation.
Recently, the super expedited service, which was pre planned to shut down, ceased operations six weeks before analyst expectations, and the stock slid to $60 per share in December 2022. As of September 2022, revenue from ocean transportation contracted from 2021 levels, expectedly, and revenue from logistics expanded.
Warning signs and risks
Global Recession, Oil Prices, and Spot Rates
Shipping companies are inherently reliant on globalization and international trade. If demand in overall spending for both discretion and necessity falls, then ocean transportation will suffer. If you have noticed, oil prices have declined since the peaks in mid 2022. Although this is good for the Fed’s battle against inflation, margins for producers, and consumer savings, it reflects a potential decrease in demand for oil, which could indicate an incoming recessionary environment.
In addition, a common folly of those who invest in shipping companies is to try to time the rise and fall of spot freight rates. Spot rates are one time fees that tankers and transporters charge for the shipment of a single load. Since the peak in spot rates in early 2022, prices are on the decline, which could imply that shippers’ pricing power and revenues will decrease. The problem with this strategy is that it is extremely speculative. There could be an abundance of unknown unknowns that will affect spot rates in the future and to develop an investment thesis based primarily on this factor is nonsensical.
Increased Insider Sales
Since mid-2022, Chairman & CEO, Matthew Cox, and several Executive Vice Presidents have sold shares of MATX. Executives sell stock for a variety of reasons: they want to have more cash on hand, need to pay for the mortgage, or have various life reasons to sell. What troubles me is the frequency of sales in a short period of time. However, I think these executives made their open market dispositions with the prior knowledge that the CLX+ service was shutting down before analyst expectations, and they wanted to cash in on the success the company had with its super expedited product.
This trend of increased insider selling is not unique to Matson by any means. Companies like Tesla (TSLA), Moderna (MRNA), and Rollins (ROL) among others have had insiders liquidate a significant amount of stock amid the threat of rising interest rates, acquisition funding, and overall equity market concerns.
What makes Matson well positioned to battle challenges?
Competitive edge
During a challenging time for many companies that were fearful of low inventories, Matson developed its brand as the go-to fastest shipping company in the Pacific. The flexibility and ability to adapt to the global supply chain situation was an impressive feat. Because of the strong pre-existing relationships with Pacific island nations, port exclusivity, and high entry costs, Matson is well positioned to continue operating its lifeline services in any economic environment.
Boatloads of cash and solid balance sheet
The Company’s success in 2021 and early 2022 is displayed by its cash & short term investments increasing to $242 million in September 2022 from $14 million in December 2020. Matson is starting to allocate its capital through stock repurchases, debt paydowns, and three brand new LNG-ready vessels. As of September 2022, Matson’s total debt/ebitda was 0.3x, current ratio was 1.5x, and Altman Z-Score was 3.5. After over 100 years of existence and a strong financial position, the Company will be able to weather a recessionary environment or capitalize on a return to globalization.
Globalization in 2023?
With China potentially coming back online, Hawaii tourism reaching pre pandemic levels, and an unlikely but potential pause or conclusion to the War in Ukraine, Matson could surprise the Street in how it performs over the next few quarters. These potential tailwinds could draw some investor optimism back to the ocean transportation industry and specifically Matson.
Shipping companies and valuations
Matson is currently trading at 0.5x EV/Revenue, 1.83x P/E, 1.04x P/BV, and 1.34x EV/EBITDA. From what I’ve discerned, P/BV is a major factor for how shipping companies are valued because of their asset intensiveness, and MATX’s P/NAV (P/BV) is trading at a slight premium (1.04x). The hope is that depressed valuations will limit a tail end outcome in an investment in MATX and will look attractive in case of an economic turnaround.
Continue the Research
Overall, Matson is a strong company that has had an extreme amount of recent success, services communities that are dependent on its business, and possesses a combination of compressed valuations and potential macroeconomic tailwinds. Results for FY2022 should be released on February 17th, 2023, and it will be interesting to hear how China’s reopening affects the Company’s outlook for 2023 among all the other factors discussed above.
As always, there’s more to learn about the maritime industry, Matson, and the pessimism surrounding the security. It was interesting to revisit the transportation industry from a perspective other than strictly trucking and intermodal rail.
Similar to TSM and HUBG, MATX is a stock in an industry that is being affected by investor pessimism, but where there is pessimism, there is value.
In 2023, I want to start writing more and take greater risks with the companies I write-up.
If you have more questions or want to talk all things markets, shipping companies, or MATX, do not hesitate to reach out on twitter (@achaiondotcom), instagram (@achaiondotcom), or shoot me a text.
Employ your curiosity.
-Maximus Beach
Learn more about Maximus Beach’s background here.
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