Pull up a quote on any given shipping stock, and you're likely to find an irresistibly low P/E ratio. But before you call your broker, take a glance at the forward P/E, and you might find the shippers aren't as cheap as you think.
Falling earnings, rising P/Es
Let's look at the trailing and the forward P/E ratios of some leading shipping stocks.
Star Bulk Car.
All figures are as of 10/23/2011.
The trailing P/E is based on past earnings. But future earnings are all we really care about. And the future doesn't look too bright according to 2012 consensus estimates.
If earnings evaporate in 2012 as many analysts project, next year's trailing P/Es will either adjust higher, as is the case of Diana Shipping and Navios Maritime, or vanish altogether, as is the case for the remaining three stocks in the table.
But wait -- there's more
Of course, P/Es don't tell the whole story. There are many other factors to consider. For instance, shippers with strong balance sheets (Diana Shipping) might represent a great buying opportunity if weaker competitors fail to stay afloat, so to speak. And even the struggling shippers could reverse course if the economy unexpectedly rebounds.
The bottom line
Don't be deceived by a low trailing P/E. Look at the forward P/Es and numerous other factors before pulling the trigger.