Industry Description

The U.S. freight shipping industry comprises deep sea freight transportation, inland water freight transportation, and coastal and Great Lakes freight transportation (SIC 4412, 4424, 4432, 4449; NAICS 483111, 483211, 483113).  It is a subsector of the water transportation sector (NAICS 483).  The global deep-sea, coastal, and inland water transportation industry has experienced an estimated average annual growth of 0.8% from 2011 to 2016.[1] The U.S. freight shipping industry had similar growth over the same period, in line with the global trend.[2]

The deep sea shipping industry is highly concentrated with the top 50 companies generating more than 90% of total industry revenue.   Within this industry intermodal containers make up approximately 50% of industry revenue, followed by boxed and palletized goods (20%), bulk liquids and gas (10%), dry bulk cargo (5%), and other freight services (15%).[3]

The industry is primarily focused around major ports. Within the U.S., the top three ports ranked by tons of traffic are the Port of South Louisiana, Houston, and New York/New Jersey.  The top three ports ranked by container traffic are Los Angeles, Long Beach, and New York/New Jersey.[4]

As of 2017, the world’s top 10 maritime shipping companies ranked by cargo capacity are: [5]

  1. APM-Maersk
  2. Mediterranean Shipping Company
  3. CMA-CGM Group
  4. COSCO Container Line
  5. Evergreen Line
  6. Hapag-Lloyd
  7. APL
  8. Hanjin Shipping
  9. CSCL
  10. MOL

Industry Trends

Trends in the shipping industry are primarily driven by changes in the world economy.  A few of the more notable trends include:

  1. The industry is greatly challenged by overcapacity, and has experienced a continuous down trend in the past few years.  The shipping industry is closely aligned with the world economy and international import and export trends.  Company profits has been greatly influenced by continued growth of overcapacity and decreasing freight rates. However, the market may have bottomed out in 2016 and is expecting a slight recovery of freight rates. [6]
  2. The overall overcapacity in the industry also led to increasing industry mergers and acquisitions (M&A) and other restructuring activities.  The companies’ efforts to consolidate and restructure are expected to continue.
  3. There remains a potential upside to invest in niche sub-markets.  Companies could stay competitive not only by offering cheaper rates, but also by investing in specialization.  There are many niche categories of goods and products that need specialized shipping services, especially in industries like food, chemicals, and bio-pharmaceuticals.  Investing in specialized ship types may improve companies’ competitive landscape and boost profit margins.

Key Performance Metrics

The following are some of the performance metrics that managers in the freight shipping business use to benchmark their performance against others in the industry:

  1. Twenty-foot equivalent units (TEUs, a measure of cargo capacity)
  2. Freight cost per unit shipped
  3. Loss and damage claims as percentage of freight costs
  4. Percentage of containers full
  5. Operating margin
  6. Capital expenditure

Industry Organizations and Publications

Some organizations that publish helpful information about freight shipping include:

  1. U.S. International Logistics website: www.export.gov, forms and information about exporting freight out of the U.S.
  2. International Freight Association: www.ifa-online.com, an association of logistics and transportation companies covering 160 international locations
  3. International Chamber of Shipping: www.ics-shipping.org, in association with the International Shipping Federation it forms the principal trade association for merchant ship operators and publishes annual reviews of the global shipping industry
  4. Marine Insight: www.marineinsight.com, news and articles covering the maritime, cruising, boating, and offshore industries

Summary of Valuation Approaches

There are four different types of valuation methods that can be used to value freight shipping companies, as follows:

  1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets.
  2. Income approach to value (capitalization of earnings): This method is most applicable to companies that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
  3. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.
  4. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded freight shipping companies and privately held businesses.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

The following benchmarking data is based on coastal and great lakes freight transportation industry (NAICS 483113):

 

2015

2014

2013

2012

2011
Operating profit %

13.1%

18.4%

16.7%

13.9%

11.4%
Profit Before Tax %

9.3%

14.6%

14.5%

11.1%

8.4%
Sales/Fixed assets (median)

1.3

1.0

1.4

1.0

1.8
Current ratio (median)

1.0

1.2

1.3

1.1

1.1

 

The following benchmarking data is based on deep sea freight transportation industry (NAICS 483):

 

2015

2014

2013

2012

2011
Operating profit %

10.0%

8.8%

11.1%

11.6%

9.4%
Profit Before Tax %

6.1%

6.7%

7.6%

8.8%

7.6%
Sales/Fixed assets (median)

1.6

.9

1.1

.7

1.8
Current ratio (median)

1.4

1.3

1.2

1.4

1.2

 

Before using the above data [7]  for specific valuation purposes it should be evaluated for appropriateness.

Availability of Publicly Traded Comparable Companies

Many of the large freight shipping companies are publicly traded on foreign exchanges. The availability of financial data for publicly traded deep sea freight companies makes it possible to compare a subject company to industry benchmarks and apply industry multiples.  When valuing a freight business, however, it is important to use benchmarks and multiples based on companies that are similar to the subject company.

The top 5 publicly traded marine freight transportation companies in the U.S. by market capitalization are: [8]

  1. Ship Finance International Limited (SFL)
  2. Euronav NV (EURN)
  3. SEACOR Holdings, Inc. (CKH)
  4. Frontline Ltd. (USA) (FRO)
  5. Teekay Shipping Corp. (TK)

The TTM (trailing twelve months) price to earnings ratios of these companies range from negative (not meaningful) to 9.25, price to book ratios range from 0.68 to 1.21. [9]

Availability of Private Purchase Transactions

In addition to public companies, data regarding private transactions can also provide a useful benchmark when valuing a marine freight company.  Fulcrum reviewed information regarding private company purchases of deep sea and coastal freight transportation industry.  The size of companies that have been bought and sold varies greatly, both in terms of their sales and the purchase price paid for the companies. From 2012 to 2016, transactions show the following ranges: [10]

  1. Market value of invested capital (MVIC) to Net Sales ranged from 0.16 to 0.94, with a median of 0.55.
  2. MVIC to earnings before interest, taxes and depreciation (EBITDA) ranged from 7.05 to 10.39, with a median of 8.72.

Multiples should be adjusted by deal size as well as other key profit drivers. The financial metrics of a potential guideline transaction should be compared with those of the subject.  Specific factors that are unique to each business must be considered.

Fulcrum Inquiry performs business appraisals for shipping companies and other businesses.

______________________

[1] IBIS World, Industry Report

[2] US Census Bureau, Service Annual Survey

[3] Hoovers – Deep Sea Freight Transportation Industry

[4] AAPA, World Port Rankings 2014

[5] “Alphaliner – Top 100, Operated fleets as per 27 February 2017” www.alphaliner.com

[6] Drewry, Container Shipping Market Has Bottomed Out

[7] Risk Management Association (RMA), Annual eStatement Studies

[8] Nasdaq, Company List – Transportation Companies

[9] Yahoo Finance, As of Feb 27, 2017

[10] Pratt’s Stats