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Quality Over Quantity: One Stock All Investors Should Own

Despite a tumultuous economic backdrop, energy demand is set to soar over the year. Amid this, we think energy transporter Overseas Shipholding Group (OSG) has the fundamental strength and quality to convert rising energy prices to increasing shareholder returns. Read on…

Multiple stressors in the global macroeconomic environment suggest that we may not be out of the woods with regard to the persistent inflation and the increasing threat of a Fed-induced recession. Hence, investing in shares of fundamentally strong and high-quality businesses, such as Overseas Shipholding Group, Inc. (OSG), could ensure consistent, risk-adjusted returns.

The markets ended a tumultuous quarter, dotted with crisis and close calls in the banking sector along with the usual rate-hike drama, on a positive note with a slowdown in the core Personal Consumption Expenditures (PCE) price index in February.

This has raised hopes of a nearer-than-previously-expected end of the Federal Reserve’s fight against stubborn inflation with equally persistent interest-rate hikes.

Moreover, due to rebounding Chinese demand and air traffic, global oil demand growth is set to rise considerably over the course of 2023, from 710 kb/d in the first quarter to 2.6 mb/d in the fourth quarter.

The increase in energy demand could play in the hands of an energy transporter, such as OSG. It owns and operates a fleet of oceangoing vessels engaged in transporting crude oil and petroleum products. The company charters its vessels to customers for voyages for specific periods at fixed daily amounts through time charters and for specific voyages at spot rates.

The stock has gained 4.3% over the past month and 31.3% over the past six months to close the last trading session at $3.90, above its 50-day and 200-day moving averages of $3.68 and $3.01, respectively.

Let’s closely examine the factors that make it worthy of investment.

Impressive Track Record

Over the past three years, OSG’s revenue and EBITDA increased by 9.5% and 18.2% CAGRs, respectively. During the same time horizon, the company has grown its net income and EPS by 45.2% and 44%, year-over-year, respectively.

Strong Business Performance

During the fourth quarter of the fiscal year that ended December 31, 2022, OSG’s shipping revenues increased 27.5% year-over-year to $121.76 million, while its operating income came in at $20.42 million, compared to an operating loss of $1.89 million during the previous-year quarter.

Its adjusted EBITDA also increased 162.7% year-over-year to $46.3 million, driven primarily by the increase in TCE revenues. During the same period, the company’s net income came in at $10.09 million or $0.11 per share, compared to a net loss of $3.68 million or $0.03 per share during the fourth quarter of the previous fiscal year.

Growing Profitability and Capital Discipline

OSG’s trailing-12-month gross profit margin of 34.45% is 24.8% higher than its five-year average of 27.61%. Also, the company’s trailing-12-month EBITDA margin and net income margins of 24.39% and 5.69% comfortably exceed its five-year averages of 17.30% and 2.91%, respectively.

Additionally, OSG’s trailing-12-month ROCE, ROTC, and ROTA of 7.83%, 4.16%, and 2.33% also compare favorably to the respective five-year averages.

Consistent Return of Capital to Shareholders

OSG’s robust financials and strong performance have enabled it to reward its stockholders with significant share repurchases, which provide appropriate compensation to shareholders seeking an exit while increasing the intrinsic value of the holdings of existing shareholders.

On March 17, OSG announced that its board of directors had authorized a program to purchase up to ten million shares of the company’s common stock. Pursuant to this, the company would be able to repurchase shares at its discretion from time to time in open market transactions or in privately negotiated transactions.

Previously, on November 15, 2022, OSG announced that it had agreed to purchase five million shares of the company’s common stock from Cyrus Capital at $2.86 per share for a total of $14.30 million.

These repurchases demonstrate the company’s confidence in its prospects while giving it the flexibility to manage its cash in a way that it believes will best serve its shareholders.

Attractive Valuation

OSG’s trailing-12-month Price/Sales multiple of 0.75 is 36% below the industry average of 1.17. Similarly, its trailing-12-month Price/Book multiple of 0.90 compares favorably with the industry average of 1.60.

Robust Pipeline and Stable Prospects

On December 8, 2022, OSG announced that it had exercised options to extend its six bareboat charter agreements with American Shipping Company ASA (AMSC) for an additional three-year term, beginning in December 2023. With these extensions, seven vessels will continue on lease from AMSC as key contributors to OSG’s steady and robust earnings.

POWR Ratings Reflect Robustness

OSG’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. OSG also has A grades for Quality and Momentum, consistent with its impressive profitability and the uptrend in price action.

OSG has B grades for Value, Growth, and Sentiment, consistent with its discounted valuations, impressive track record, and optimistic outlook.

Unsurprisingly, OSG tops the list of 42 stocks in the A-rated Shipping industry. Click here for all ratings of OSG.

Bottom Line

Given the expected rise in crude oil demand, OSG’s fleet operations might get a boost. Moreover, the company exhibits fundamental strength and quality. Therefore, I think OSG deserves a place in every investor’s portfolio.

How Does Overseas Shipholding Group, Inc. (OSG) Stack up Against Its Peers?

In addition to OSG, which has an overall rating of A,  investors could also consider looking at other A-rated Shipping stocks: StealthGas Inc. (GASS), Teekay Corporation (TK), and TORM plc (TRMD). 

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OSG shares were trading at $3.90 per share on Monday afternoon, down $0.00 (0.00%). Year-to-date, OSG has gained 34.95%, versus a 7.88% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.


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