Can Frontline Make It to Safe Harbor?

Wall Street can't generate enthusiasm for shipping magnate Frontline (FRO -2.95%), so why do our Motley Fool CAPS members disagree? More than 1,600 members of the investor-driven community have weighed in on its prospects, and 94% of them see it outperforming the broad market averages, bestowing on it high honors with a four-star rating. In contrast, more than half of the nine analysts rating it believe it will sink.

So who has it right? The professional class of analysts sitting in their paneled offices smoking stogies, or a motley community of investors pooling their best thoughts for others to share? We think we know who'll come out ahead. How about you?

Frontline snapshot

Source: FinViz.com. N/A = not applicable.

Of course, as much as we love our CAPS community, don't buy a company just because its garnered top ratings. And don't sell it just because Wall Street says to, either. Investing requires closer diligence on your part, so use a stock's CAPS rating as a launching pad for your own research.

A perfect storm
The shipping industry still sails on troubled waters of too much inventory, too low rates, and not enough demand. Frontline recently canceled its long-term charter with Ship Finance International (SFL 0.23%) for two ships, which then turned around and sold them to someone else, while it told Nordic American Tankers (NAT 0.27%) that nine Suezmax vessels it had in a pool would be withdrawn so it could be more flexible. Nordic will end up buying Frontline's 50% stake in the pool manager.

The time charter equivalent rates its receiving haven't matched up very well with prior quarters either. Very large crude carriers, or VLCCs, lost 60% of their value in the spot and period market from one period to the next, while its Suezmax rates were down 35% period to period. The Orion Suezmax pool that Nordic just agreed to purchase dropped 36%, all of which led Frontline to report a loss of $49 million in the third quarter and to suspend paying a dividend for the current period.

Stormy seas
The shipping industry can't seem to get ahead of its oversupply problem, because it keeps adding new ships to the market, which cuts into fleet utilization rates along with charter rates and ship values when they want to sell them off.

According to Teekay Tankers (TNK 0.23%), the global tanker fleet grew by 3.1% over the first nine months of 2012 to 14.6 million deadweight tons, though that's a marked improvement over the 22% expansion seen in the same period a year ago. The easing growth points to the achievement of an eventual equilibrium.

Yet with a slowing global economy, there's not enough work for the existing fleet, let alone new ones, and other analysts point to order books that remain relatively elevated for new builds, so don't expect a recovery in charter rates anytime soon.

There have been several high-profile implosions in the shipping industry, leading a number of shippers to go through restructurings to ward off a similar fate. Frontline shifted assets around earlier this year, creating a new vessel, Frontline 2012, in the process, as others such as Danish shipper TORM (NASDAQ: TRMD), with feet in the liquids market as well as dry bulk, just completed a reorganization.

Looking for safe harbor
As hopeful as the CAPS community is, I find it difficult to see the catalyst for a turnaround at the moment in Frontline. It might be healthy enough to survive the conditions that swamped much of the rest of the industry, but that doesn't mean investment here won't be more than dead money for some time to come. While that means you'll lose out on some of the profits that would materialize on a sudden rise in its stock, you've also minimized the risk inherent in another wave washing over shippers.

Of course, at around $3.50 a share, there's less downside here than there was when it was trading at $8 earlier this year, but less risk doesn't mean no risk. I'll pass on recommending it to outperform the broad indexes, but let me know in the comments section below when you think it will be able to sail on calmer waters.