August 31, 2010
After spending the past two years stuck at the four-star rank, shipper Frontline (NYSE: FRO ) has won over enough top-performing members of our 165,000-strong Motley Fool CAPS community to finally break through and spend some time at the five-star level. A total of 1,612 members have given their opinion on the oil transporter, with many of them offering a peek behind the recent optimism.
Frontline followed an increase in first-quarter profits with second-quarter earnings that nearly tripled over the prior year. While competitors like Ship Finance (NYSE: SFL ) and DHT Holdings (NYSE: DHT ) reported a dip in quarterly revenue, Frontline joined peer Nordic American Tanker Shipping (NYSE: NAT ) in posting top-line growth while its operating margin grew by 11%. While operating performance has been volatile over the past few years, many investors are taking comfort in the stock's solid dividend yield.
The company does face some challenges: Management warned of an increase in industry ship deliveries over the next couple of years that could depress the tanker market. It's the same for the dry bulk shipping market, where companies like Genco Shipping & Trading (NYSE: GNK ) and Navios Maritime Holdings (NYSE: NM ) have been expanding their fleets. But Frontline also drew fewer deliveries of tanker vessels than expected in the first half of 2010, which could help ease oversupply concerns in the market if the trend continues. Despite some of the short-term obstacles, many CAPS members are banking on growth in oil demand to help in the long term.
Frontline itself has given some credence to this view, reporting some positive effects from oil demand in China in its recent conference call. Indeed, top Chinese oil company PetroChina (NYSE: PTR ) expects even stronger demand in the second half than it reported in the first half and continues to pursue foreign oil projects with companies like BP and ExxonMobil. Some CAPS members believe China will play a major role in future demand because it imports massive amounts of oil to support its appetite for energy.
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