Golden Ocean: Rewarding Stock in a Down Market

Golden Ocean (GOGL) is a dry bulk shipping company that owns a fleet of Panamax, Capesize, Newcastlemax, and Ultramax vessels.

The company works on spot and time markets globally, carrying goods such as ores, coal, grains, fertilizers, and more.

The firm is well aligned to take advantage of high commodities activity and is a “best-in-class” pick. I’m bullish on the stock.

Activity in Dry Bulk Market

The dry bulk market has been extremely active lately. A combination of pandemic reopenings and an ex-Russia trade world has left the space in overdrive.

Furthermore, high commodity prices have brought much profitability to the primary producer sphere, subsequently rallying upstream business activities.

The primary catalysts behind Golden Ocean’s recent success have been the coal and ferrous metals industries. This is due to the globe’s significant energy shortage, which has driven up the demand for coal as an interim solution. Additionally, the world used to be very much reliant on Russian iron ore, which has now changed.

Golden Ocean holds a sizable fleet of Capesize vessels. The company’s Capesize vessels are thriving at the moment as they’re being used to transport iron ore and coal from distant locations in the Southern Hemisphere, such as South Africa and Australia. Capesize vessels are popular options for ferrous metals and coal due to their sheer size.

Company Earnings & Outlook

The company strolled past its fourth-quarter earnings target, beating analyst estimates by 15 cents per share. Golden Ocean produced an EBITDA of $243.5 million during the quarter, and a net income worth $203.8 million.

Furthermore, the firm’s balance sheet is robust, with an LTV ratio of 41%, and cash and equivalents amounting to $197 million.

Another factor worth being optimistic about is Golden Ocean’s pivot from a dry bulk pure play into a more balanced maritime enterprise, which has seen it sell a few of its vessels.

The company recently sold two Panamax vessels for a cumulative of $52 million, which adds volume to its balance sheet.

Looking ahead, Golden Ocean’s management expects a sustainable first quarter. First off, it’s anticipated that Golden Ocean’s Capesize and Panamax vessels will run at utilization rates of 75% and 72%, respectively.

Secondly, dry bulk demand and utilization is expected to outpace supply throughout 2022, providing the company with much revenue potential.

Key Metrics

Golden Ocean’s style factors are all very sound. Firstly, the company’s return on invested capital of 24% means that it’s holding up a strong market position with efficient capital deployment.

A high ROIC is often an indication that a company doesn’t have to spend elaborately on obtaining a competitive edge, which leads to the conclusion that it can produce solid residual value for its shareholders.

Furthermore, Golden Ocean has invested aggressively during the past year, conveyed by its CapEx expanding by 16.6x year-over-year. The firm’s CapEx on maintenance and internal investments will allow it to strive for growth in the coming year, which could see its forward free cash flow per share of 45.24% come to fruition.

Lastly, Golden Ocean is showing signs of economies of scale. The firm’s gross profit margin of 54.1% means it can quell rising input costs, thus putting it in a better position to fight inflation than its peers.

Valuation

Golden Ocean stock is significantly undervalued. It’s always prudent to look at forward price multiples whenever valuing a company that’s scaling rapidly.

The stock’s forward P/E ratio of 7 is undervalued relative to the broader sector by 61.4%, suggesting that the firm’s earnings growth is overlooked.

Furthermore, Golden Ocean exhibits an attractive price-to-cash flow ratio of only 4.2. This is well below the generally accepted value threshold of 15, and 73% below the sector average.

Furthermore, the stock’s EV/EBITDA is trading at a 44.2% discount to its normalized five-year average, suggesting that the firm’s generating quality income relative to its value.

Dividends

The shipping company has a monstrous dividend yield of 21.4%. This probably isn’t sustainable as it’s currently having to pay out 94% of its earnings to achieve the yield.

Nonetheless, Golden Ocean currently boasts $560.40 million in cash from operations, and an interest coverage ratio of 17.9x, suggesting that lucrative long-term dividends are possible.

Wall Street’s Take

Turning to Wall Street, Golden Ocean earns a Moderate Buy consensus rating based on one Buy and one Hold assigned in the past three months. The average Golden Ocean stock price target of $18 implies 44.7% upside potential.

Bottom Line

Not all shipping stocks are in great shape at the moment, but the dry bulk industry is currently driven by global trade restructuring and energy shortages, which have stimulated demand for iron ore and coal from alternative sources.

Golden Ocean is well aligned to take advantage of the systemic climates, and its undervalued stock is certainly one to consider moving forward.

Discover new investment ideas with data you can trust.