Photo Credit: CNBC
As oil prices rise and the cost to ship goods grows steadily, there is a boom waiting to happen in the shipping industry. Semi-trucks and other transportation methods are becoming horribly expensive for long distance shipping. On the other hand, railroads and freight shipping companies have much to gain from higher prices; shipping by rail is extremely energy efficient and actually rather “green” for the eco-friendly investor.
Slower shipping is better for freight
Shipping may slow, but it has to be understood that products will always need to be shipped from factory to the point of sale. Even amid higher prices, goods will continue to travel, but $4.50 a gallon diesel is likely to send goods from the 18-wheelers to the track bound shippers. Even sea travel is far more efficient than traveling through the sky, though more time consuming. There is an equilibrium somewhere – perhaps in short run semi-truck transport, with long distance goods making their way by sea or air. To profit from this phenomenon, investors should place themselves in a position of exposure to long distance shippers.
A small benefit also comes in the form of waning investor sentiment in the overall freight sector. Rather than sticking with the tried and true, investors look to dump shares of shipping companies fearing higher prices. If anything, there is more money to be made in efficient shipping than there is in other sectors. Investors should take positions to profit from the shift in means of transport from road to rail.
Get in on the cheap
The shipping sector appears to be selling for a great discount. Dry Ships (DRYS) is a company that transport goods overseas. Though the company has taken a hit from the heightening cost of energy, it benefits from the shift from fast paced shipping to slower sea travel. The company sells at a low PE ratio of 7.9, something unheard of in profitable companies. Further, the company posted quarterly earnings that were better than Wall Street’s expectations. Earnings more than doubled year over year in the same Q1 report: proof that transportation is favoring less expensive means, even if it does take more time.
For exposure to rail transport, investors should consider an investment in Burlington Northern Santa Fe, which sells at a much higher PE ratio of 20, but boasts a PEG of just 1.35. As transport shifts from the roads to rail, investors should expect a gain to the bottom line. Companies seeking freight transport are likely to be willing to pay a premium price for rail because the only alternative (the roads) is much more expensive.
There is a coming boom in the shipping industry any way you cut it. Avoid exposure to roadway transport companies and look for the alternative. Expect a red hot bulk shipping sector as companies shift their goods from different means. Buy now and hold; as energy prices rise, the customer base for these bulk shippers should as well.