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Nordic American Tanker's new share offering might not be that bad

Part 8
Nordic American Tanker's new share offering might not be that bad (Part 8 of 8)

Why Nordic could be undervalued by 25% if analysts are right

Price target differences

While Nordic American Tanker Ltd. (NAT) might eventually climb back up to $15, given time and when the yearly earnings for a Suezmax vessel hit above $21,500, analysts’ estimated target prices vary quite significantly—from as low as $7.00 to as high as $14.00 a share. In part, this is due to the wide difference between analysts’ earnings estimates, which range from $41 million to $91 million.

Nordic's Valuation Target and Suez Time CharterEnlarge Graph

The chart above uses the forward EV/EBITDA valuation, adjusted for forward EBITDA margin, to value Nordic American Tanker Ltd.’s (NAT) share price. It also assumes that Nordic will purchase three or four vessels using recent proceeds, and that the company’s vessel operating, general, and administrative expenses per vessel day stay similar to the last three years.

Is Nordic undervalued?

The current $8.62 share price suggests the market is expecting rates to average ~$17,000 a day. If rates average $21,000 a day for a Suezmax fleet this year, Nordic should be valued at ~$11.54. Because Nordic’s vessels are older than they were a few years ago, the value would be lower, but maybe not too much, since tankers can be used for up to 25 to 30 years if they’re well taken care of.

If the consensus estimates for the next four quarters increase, and the market’s expectation converges with the consensus, Nordic is now trading at a value territory—which may mean the Guggenheim Shipping ETF (SEA) and Nordic’s peers, such as Frontline Ltd. (FRO), Teekay Tankers Ltd. (TNK), and Tsakos Energy Navigation Ltd. (TNP), may also be undervalued. Whether expectations will improve will depend on movements in shipping rates and the Baltic Dirty Tanker Index.

Appreciation over time

Note the $11.91 is based on estimates that an average rate of $21,000 will be realized over the next four quarters. As we near the end of the year, people will start looking at 2015’s EBITDA estimates, which is currently at $83 million. If the market believes that 2015’s EBITDA estimate of $83 million will be realized by the end of this year, then Nordic’s share price could appreciate to $14.53 over time, as fleet utilization gradually improves on higher demand to supply growth. If the expectation is that EBITDA of $83 million will materialize sooner, share prices could rise earlier.

Note: Buying individual companies comes with risks unrelated to industry fundamentals. Investors who don’t understand such risks might want to consider ETFs such as the Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide. 

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