Is General Maritime a Bargain by the Numbers?

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how cheap shipper General Maritime (NYSE: GMR  ) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

General Maritime has negative P/E and EV/FCF ratios over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, General Maritime has a P/E ratio of 5.9 and a five-year EV/FCF ratio of 26.1.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

General Maritime has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

General Maritime

NM

NM

5.9

26.1

Frontline (NYSE: FRO  )

13.6

NM

4.8

17.8

Overseas Shipholding Group (NYSE: OSG  )

NM

(4.9)

4.5

NM

Teekay (NYSE: TK  )

NM

41.8

222.9

NM

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Numerically, we've seen how General Maritime's valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, General Maritime's net income margin has ranged from -16.8% to 49.1%. In that same time frame, unlevered free cash flow margin has ranged from -11.1% to 38.2%.

How do those figures compare with those of the company's peers? See for yourself:

Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.

Additionally, over the last five years, General Maritime has tallied up four years of positive earnings and four years of positive free cash flow.

Next, let's figure out ...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. Unfortunately, this isn't helpful due to the current negative earnings. Against this, Wall Street's analysts expect future growth rates of -3%.

Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of General Maritime are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a negative P/E ratio.

A key takeaway is that the shipping industry's financials can be just as choppy as the seas they traverse. Analysts see negative growth ahead for General Maritime and its competitors. Bulls will point to some of the miniscule 5-year P/E ratios and argue for a cyclical play, but I'd be more comforted if the free cash flow ratios followed suit.

Still, if you find General Maritime's numbers compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.

Click here to add General Maritime to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Anand Chokkavelu doesn't own shares in any company mentioned. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2010, at 6:30 PM, psl8er wrote:

    Comparing today's numbers with the past five years is a pointless and misleading exercise. The earnings that ships enjoyed up until mid 2008 were a bubble that is not going to repeat for at least another 10 years(the time it will take to absorb the excess capacity that the newbuilding orderbook has created) if then. Go to current basics; Mark the ships values to market, assume income that covers only operating costs and interest and a no dividend policy.

  • Report this Comment On October 27, 2010, at 3:04 PM, rlett9 wrote:

    with the new regulations for dbl hull ships,

    I believe Gmr is well prepared. With the new requirements imposed by the United Nations,

    and the shippling hazards threatened by Iran,

    should increase shipping from many more remote locations. @ $3.69 it has to be close to bottom,

    and takeovers looking.....

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1343877, ~/Articles/ArticleHandler.aspx, 11/23/2014 10:08:36 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement