Similar to upstream (XOP) companies, shipping companies are cyclical and volatile in nature. These companies are capital intensive with high levels of depreciation and amortization. Also, these companies have varying degrees of financial leverage. Such companies are better valued and compared using EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization).
Forward EV-to-EBITDA tells us how a company is valued for each dollar of EBITDA that the company is expected to earn. A lower ratio might indicate a company is undervalued, but not always.
Frontline’s lower valuation multiple
Comparatively, Frontline (FRO) has the lowest valuation multiple of 4.18. Though the company has substantially reduced its debt in total capital, it still is the most leveraged company among its peers. This increases the financial risk of the company. Also, it has 82% of its vessels in the spot market that indicate unpredictable, uncertain, and volatile cash flows.
Nordic American Tanker
Nordic American Tanker (NAT) has the least financial risk, as it is highly solvent and liquid. It is trading at a one-year forward EV-to-EBITDA of 7.06, which is the highest among its peers. This company can also be valued using dividend yield. It has an attractive dividend yield of 9.86.
Other companies’ valuations
DHT Holdings (DHT), like Nordic American Tanker (NAT), is less leveraged. Also, DHT Holdings (DHT) has lower spot exposure. Most of its vessels operate on a fixed time charter basis. This gives the company a very stable and predictable cash flow that reduces the risk of the company. It is currently trading at a forward EV-to-EBITDA multiple of 5.59.