Image: Matson.

Hawaii is a dream location for most Americans, but getting vital goods and services from the mainland to the islands can be a logistical nightmare. That's how Matson (MATX 0.58%) has found a key niche in the domestic shipping market, taking advantage of legal protections for carriers shipping between the mainland and Hawaii and riding the rising demand for shipping to a dominant position in the market. Matson has climbed to new highs recently on the expectations for further growth, and coming into Monday afternoon's first-quarter financial report, Matson investors wanted to see signs that the company can keep raising its profits. Matson gave investors much of what they were looking for. Let's take a closer look at how Matson did this quarter and more importantly, what's ahead for the shipping company in the future.

Matson rides the waves
Interestingly, Matson's growth came almost entirely to its bottom line. Revenue rose at just a 2% rate to $398.5 million, which was far less than the roughly 9% growth rate that most of those following the stock had expected. Yet as we saw last quarter, Matson squeezed as much profit as possible from its limited sales growth, as earnings of $25 million were up more than sevenfold from year-ago figures, equating to $0.57 per share, topping the consensus estimate of $0.55.

A closer look at Matson's segments shows some of the forces that the company has had to navigate lately. The Ocean Transportation division, which makes up more than three-quarters of the company's overall revenue, saw sales rise just 3.7%. But a huge drop in operating costs and expenses -- especially on the fuel front -- send operating income up 367% as margins more than quadrupled. Container trade with China again led the way with 5% growth, with Hawaii container trade finishing up slightly. By contrast, drops in automobile shipments to Hawaii as well as containers to Guam, Micronesia, and the South Pacific pulled down total unit volume downward by nearly 10%.

Matson's logistics division performed less well, as sales fell 5.3%. Highway-related revenue was nearly flat, but a big 9.2% drop in intermodal revenue resulted from port congestion on the West Coast and the resulting drop in international intermodal volume overall. Again, though, an even bigger drop in expenses led better profitability for the segment, albeit with razor-thin margins that didn't add much to the company's overall bottom line.

Image: Matson.

CEO Matt Cox was generally pleased with the results, once again citing the company's expedited China service and other shipping options. At the same time, Cox said, "Lower bunker fuel prices positively affected our results, primarily due to timing differences as fuel surcharge collections outpaced fuel expenditures."

What's ahead for Matson?
Matson keeps its fingers on the pulse of the economy, and it generally likes what it sees. The company expects China to continue to be a lucrative market given its expedited service, and it believes that the Hawaiian economy is in a recovery that should help it grow modestly this year. Heightened competition in Hawaii could keep volume flat, however, and the company's SSAT terminal joint venture should still earn a modest profit for 2015. It's also important to note that cheaper fuel costs will have to get passed through to customers in the form of lower fuel surcharges, which will reduce the positive impact on earnings over time.

Despite the guidance, investors once again will have to wait to see what the projected impact of Matson's pending acquisition of the Alaska business of Horizon Lines will be. Matson believes that the deal should be finalized as soon as the end of the current quarter, but it still remains dependent on Horizon selling its Hawaii business to Matson rival Pasha. Even if the deal goes through as scheduled, investors will have to wait until August for updates to its guidance for 2015.

Matson investors were pleased by the company's latest results, sending shares up more than 3% in the first two hours of after-market trading following the announcement. In the long run, the prospects for trans-Pacific trade appear promising, especially if the Asia-Pacific region manages to rebound from its recent economic slump. Once it does, Matson will have the best chance to capitalize on the positive impact on trade throughout the region, and that should benefit shareholders over time.