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
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 |
13.6 |
NM |
4.8 |
17.8 |
|
Overseas Shipholding Group |
NM |
(4.9) |
4.5 |
NM |
|
Teekay |
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.
