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Downgrade Sinks Teekay Tankers Ltd.’s Stock Today

By Matthew DiLallo - Jan 12, 2016 at 1:05PM

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Concerns about its market exposure and valuation weigh.

 

What: Shares of Teekay Tankers (TNK 7.42%) sank 16% by 12:30 p.m. EST on Tuesday January 12, 2016. An analyst downgrade was the main weight pulling the stock downward.

So what: An analyst from JPMorgan downgraded Teekay Tankers from overweight all the way down to underweight as well as cutting its price target from $10 to $7. In doing so, the analyst cited the company's "high spot exposure and relative rich valuation." In addition to specifically calling out Teekay Tankers, the investment bank also lowered its tanker rate forecasts for 2017 through 2019, which weighed on competitors like Nordic American Tanker (NAT 3.74%).

Prior to today's plunge Teekay Tankers valuation, as measured by Enterprise Value-to-EBITDA, was a bit richer than a peer such as Nordic American Tanker:

TNK EV to EBITDA (TTM) Chart

TNK EV to EBITDA (TTM) data by YCharts

That richness has now disappeared, but the other concern remains, which is Teekay Tankers' high exposure to the spot market. Unfortunately, the same can be said for Nordic American Tankers as well. That exposure is by design, with the business models of both companies built so that they can capture higher spot rates and therefore stronger cash flow in the good times by keeping to their fleet available. However, the downside during tougher times can be very steep. 

Now what: Because of its focus on the spot market, Teekay Tankers' cash flow and its stock price can be quite volatile. Therefore, any hint that the market is turning over typically leads to concern from analysts and a wave of selling by investors. In other words, an investment in a tanker stock like Teekay Tankers isn't for the faint of heart.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Nordic American Tankers Limited Stock Quote
Nordic American Tankers Limited
NAT
$2.63 (3.74%) $0.10
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$114.67 (-0.94%) $-1.08
Teekay Tankers Ltd. Stock Quote
Teekay Tankers Ltd.
TNK
$24.48 (7.42%) $1.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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