Algoma Central (TSE: ALC) owns the largest Canadian flag fleet of dry and liquid bulk carriers on the Great Lakes – St. Lawrence Waterway. It also operates four ocean dry-bulk vessels operating in United States and Canada.
Algoma provides ship management services for other bulk carriers and owns a diversified ship repair and iron fabricating facility active in the Great Lakes and St. Lawrence regions of Canada.
Algoma Central appears extremely cheap with a market cap of $528M, a price-to-earnings ratio of 12.76 and a price-to-book ratio of 0.8. The company operates in the marine freight shipping industry with primary operations in Quebec.
The Canadian Marine Freight Industry has experienced no growth over the last several years amid the North American trade war. Volatile commodity prices have badly affected the industry and consolidation is underway.
Generally, the shipping industry is impacted by trade tensions and macroeconomics. Demand for marine freight services has been steady and could increase with signs of a trade deal between United States and China.
Algoma is primarily engaged in the business of transporting commodities such as iron ore, construction materials, coal, grain, and oil, which are in turn dependent on macroeconomic factors. Algoma has a strong balance sheet, which comprises of significant property, plant and equipment.
The company has averaged a return on assets and return on equity over the last 15 years of 6.78% and 8.26%, respectively. Further, the company has managed to sustain a reasonable level of profitability over the long term.
The company utilizes negligible amounts of leverage as part of operations. Although return on invested capital of 3.15% is on the low side, this is characteristic of the shipping industry.
Algoma has a strong executive team illustrated by double-digit operating margins over a long period. The company’s conservative financial position makes Algoma an excellent stock to own over the long term.
The company reported excellent Q2 2019 results and exceeded expectations on net income, as its multi-year new build investment program winds down. Algoma reported Q2 2019 revenue that was up 13.8% year over year, while operating expenses increased 11.6% year over year, which resulted in gross margin expansion.
Product tanker segment grew by 66% year over year as a result of an increase in the fleet and strong consumer demand. Management provided an optimistic outlook for strong demand in all segments in 2019 and 2020. Global short-sea freight segment produced weak results with five vessels in dry-dock and one vessel sold.
The company has made big investments in older carriers this year, for which the benefit has not yet materialized. Margins and profitability are expected to improve as trade wars get resolved. Significant capital allocation opportunities are expected to arise for the rest of 2019.
In conclusion, shipping stock Algoma has a strong balance sheet, trades at 12 times earnings and looks to be a great long term buy. Management recognizes the incredible potential Algoma’s stock offers and has been buying it back hand over fist for the last two years.