Choppier Waters for Shippers


By Sam Stovall Now stowed in the hold of S&P's high momentum list: the S&P 1500 Marine subindustry index, which includes companies that provide waterborne cargo shipping services (its relative strength price chart is shown below). Year to date through July 15, this subindustry index has advanced 12.1%, vs. a 1.3% rise in the S&P Composite 1500 Index. During 2004, this group gained 26.4%, vs. a 10% advance for the "1500."

After these impressive gains, the key question for investors becomes: Is there any upside potential left? Stewart Scharf, the S&P equity analyst who follows the group, thinks the sailing won't go so smoothly in the coming months.

BLUE HAWAII? He believes that uncertain global market trends and possible new tariffs on imports from China could limit the rapid growth experienced over the past two years. Additionally, fuel and steel costs remain high, as shippers continue to implement price hikes and surcharges to offset these costs.

Scharf notes that one company -- Hawaii-based Alexander & Baldwin (ALEX) -- represents about 65% of the market capitalization of this index, and with this group's projected p-e multiple for 2005 at a 12% premium to that of the S&P 1500, he recently downgraded his fundamental investment outlook to negative (from neutral).

According to The Journal of Commerce, shippers have resisted the 20% to 40% proposed peak-season rate hikes desired by ocean carriers in recent years, citing higher vessel capacity and uncertain economic conditions in the U.S. Meanwhile, Scharf notes that, with general rate hikes modest in the eastbound Pacific to the West Coast for the peak season that began May 1, transpacific shippers are implementing surcharges, notes the JoC.

MORE VESSELS. Carriers achieved better rate hikes on all-water services from Asia to the East Coast, averaging about 10%, according to Scharf. Operating costs are projected to rise 11% to 12%, due in part to capacity constraints on the rail network at the Panama Canal, which have led to increased surcharges for East Coast importers.

Drewry Shipping Consultants projects a 12.5% increase in global container volume in 2005, with exports from China (40% to 55% of cargo volume moving from Asia to the U.S. and Europe) as the main driver. Carriers in the eastbound Pacific are scheduled to add at least 40 vessels to their global fleet this year, with lines introducing four new services each in the Pacific and Asia-Europe trade.

But the stepped-up service may have a downside, says Scharf. With 130 new ships on order for east-west carriers through 2006, shippers believe capacity utilization (recently at 75% to 85%) will fall from these levels within one year, forcing freight rates down. The container industry has 1,220 ships on order (60% of existing fleet capacity), according to the résumé.

WHERE THE MOMENTUM IS. On the other side of the globe, the transatlantic Conference Agreement, or TACA, a coalition that consists of seven major container lines, is planning further rate hikes, according to the American Shipper. For shipments from Europe to the U.S., Drewry projects double-digit growth in freight rates for 2005, with westbound shipments from Europe rising 1.5% and eastbound volume growing 3.3%. An affiliate of JoC, the Port Import Export Reporting Service (PIERS) forecasts that imports from Europe will rise 4.6% in 2005, while exports to Europe will grow 4.2%.

So, there you have it. In S&P's view, the subindustry's momentum looks favorable, but the fundamentals are negative. Maybe it's time for investors to give up the ship.

Source: Standard & Poor's

Industry Momentum List Update

For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of July 15, 2005.

Industry

Commodity Chemicals

Computer & Electronics Retail

Construction Materials

Department Stores

Fertilizers & Agricultural Chemicals

Homebuilding

Managed Health Care

Marine

Oil & Gas Drilling

Oil & Gas Exploration & Production

Oil & Gas Refining & Marketing

Water Utilities

Glossary

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A+

Highest

B

Lower

A

High

C

Lowest

A-

Above Average

D

In Reorganization

B+

Average

NR

Not Ranked

B-

Below Average

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Required Disclosures

In the U.S.

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.

In Europe

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.

In Asia

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.

Globally

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.

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3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.

For All Regions:

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, NY, NY.

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This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").

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For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.

Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations. Stovall is chief investment strategist for Standard & Poor's


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