How to invest in the shipping industry
Shipping stocks are often overlooked, but one shipbroker leads the way with a compelling valuation. Should you invest?
If you spent too much time reading the headlines, you would think that London has become a global backwater with no interesting companies on its exchanges. Not so. There are many leaders in their respective industries listed here, and most are currently on sale. The world’s foremost shipbroker, Clarksons (LSE: CKN), is a prime example. Shipbroking is a huge industry but often overlooked.
Shipping and world trade: a gigantic industry
Approximately 11 billion tonnes of goods are shipped around the world annually. That figure excludes oil, gas, grain and other commodities. Overall, shipping accounts for 80% of world trade, as it remains the most cost-effective and easiest way of moving goods and commodities. No one really knows exactly how big the industry is. There is no overall regulator or database on industry operators and ships, and it is possible to operate without any real oversight. Still, two things are clear. The sector is massive, and getting bigger.
Since 2007, according to the UK government, the size of the world’s trading fleet has doubled. Based on the current order books for new vessels, growth will continue, particularly in the liquefied natural gas (LNG) tanker market. According to Clarksons, the current order book is equal to 50% of the existing global fleet, while Maritime Strategies International’s 2023 outlook estimates that shipyard capacity will hit 81 million gross tonnes in 2030, up from 67.1 million today. The new space will be needed: shipyards are fully booked out until 2028, on average.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So, where does shipbroker Clarksons fit into all of this? The company plays a pivotal role in the industry, acting as a matchmaker between ship owners and cargo owners, facilitating vessel transactions and mitigating risk with the use of derivatives. The industry truly relies on a middle party such as Clarksons to function effectively.
Shipping is an incredibly diverse industry with numerous players, both large and small, and many more entities that operate outside the industry but require its services. This complexity doesn’t easily lend itself to digitisation. There is a critical need for an intermediary that is trusted by all parties, with the right connections to execute the job in the most efficient manner.
Clarksons is the undisputed market leader in the shipbroking industry, a position that is difficult for competitors to challenge. In a broking or intermediary business without a centralised market (such as shipping), scale brings tangible benefits, as it maximises Clarksons’ ability to match counterparties. Furthermore, as a public company, Clarksons operates with a highly visible brand and a clear regulatory structure, enhancing its financial stability and transparency.
The group has also built up an advantage when it comes to data. When shipowners and charterers face market conditions and geopolitical events they have not experienced before, they inevitably seek expert insights from a highly reputable third party. As a rule, it isn’t easy to make money in the shipping industry. It requires a lot of capital to get started, and charter rates can be volatile, so returns on large investments are unpredictable. Moreover, the industry is highly cyclical. In a downturn, you might have to foot the bill of keeping ships in port empty, not to mention repair and maintenance costs, which rise with the age of the vessel.
Clarksons doesn’t have to worry about any of these problems. It takes a cut out of every deal, and its only real overheads are staffing costs. It has an asset-light business model (it doesn’t need to buy vessels) and can quickly reduce headcount in a downturn.
While the company cannot escape the cyclicality of the industry in general, Clarksons’ brokers operate across subsectors. Each shipping segment has its own demand and supply dynamics and, hence, its own cycle. That gives the company a level of protection against cyclicality. Over the past two decades, revenue has only been loosely correlated to shipping rates. For example, between 2022 and 2023, global charter rates fell by around a third. Yet Clarksons’ overall sales rose.
How to profit off the shipping industry
While there have been some bumps along the way, the company has gone from strength to strength over the past two decades as it has piggybacked on the growth of the industry. Since 2004, Clarksons has delivered a compound annual growth rate of 12.7% for revenue, 11.2% for overall operating profit, 8.4% for underlying earnings per share and 9.2% for the dividend per share.
With the industry projected to experience continued growth over the next decade (a forecast I can confidently make considering the current fleet order book), Clarksons appears well-positioned for future expansion. According to brokers at Liberum, the stock is currently trading at an undemanding price/earnings (p/e) ratio of 14.7 for 2024, with a projected dividend yield of 2.6%, rising to 2.9% by 2026.
These figures don’t even factor in the cash on Clarksons’ balance sheet. The company has consistently maintained a robust balance sheet with net cash, partly as a defence against market downturns, but primarily to reassure its customers. A cash-rich, audited balance sheet is a significant competitive advantage in an otherwise opaque industry. Remove the £400m or so of net cash on the company’s balance sheet reported at the end of 2023, and the cash-adjusted forward p/e drops to around 10. That’s a compelling valuation for a global market leader.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Rupert is the former deputy digital editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert has written for many UK and international publications including the Motley Fool, Gurufocus and ValueWalk, aimed at a range of readers; from the first timers to experienced high-net-worth individuals. Rupert has also founded and managed several businesses, including the New York-based hedge fund newsletter, Hidden Value Stocks. He has written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
-
A junior ISA could turn your child’s pocket money into thousands of pounds
Persuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
By Katie Williams Published
-
Cost of Christmas dinner jumps 6.5% as grocery price inflation rises again
The average Christmas dinner for four now costs £32.57 as grocery price inflation increases - but what does it mean for interest rates?
By Chris Newlands Published
-
Warren Buffet invests in Domino’s – should you buy?
What makes Domino's a compelling investment for Warren Buffet's Berkshire Hathaway, and should you buy the UK-listed takeaway pizza chain?
By Dr Matthew Partridge Published
-
4Imprint makes a strong impression – should you buy?
4Imprint, a specialist in marketing promotional products, is the leader in a fragmented field
By Dr Mike Tubbs Published
-
Invest in Glencore: a cheap play on global growth
Glencore looks historically cheap, yet the group’s prospects remain encouraging
By Rupert Hargreaves Published
-
Should you invest in Trainline?
Ticket seller Trainline offers a useful service – and good prospects for investors
By Dr Matthew Partridge Published
-
Key takeaways from the MoneyWeek Summit 2024: Investing in a dangerous world
If you couldn’t get a ticket to MoneyWeek’s summit, here’s an overview of what you missed
By MoneyWeek Published
-
DCC: a top-notch company going cheap
DCC has a stellar long-term record and promising prospects. It has been unfairly marked down
By Jamie Ward Published
-
How investors can use options to navigate a turbulent world
Explainer Options can be a useful solution for investors to protect and grow their wealth in volatile times.
By James Proudlock Published
-
Invest in Hilton Foods: a tasty UK food supplier
Hilton Foods is a keenly priced opportunity in an unglamorous sector
By Dr Matthew Partridge Published