Tsakos: An undervalued shipping giant

The maritime sector is hot. It's been hot for a couple of years now, but as world trade continues to grow, profits continue to grow. Greek shipping giant Tsakos Energy Navigation Ltd (NYSE:TNP) now has 53 tankers, out of which 23 ice-class tankers. True, there might not be much ice in Greek waters, but there certainly is a growing demand for ice-class tankers in Northern waters. Especially North and East of Russia at least for the coming ten years the demand for ships to transport oil & oil products will grow substantially. With an average vessel age of five years and a bit, Tsakos Energy Navigation (TEN) certainly is well-equipped for this period of growth. With a fleet that's more than doubled in five years and with net income having increased fifty times, one might argue that TEN is already too far in its growth cycle. But the opposite is true. Let's have a look at the stock's valuation. At a current share price of USD 63.50, TEN trades at a little over six times last year's earnings. This is already very low compared to the industry average of 16, but especially when considering that its 5-year EPS growth rate is almost double that of the industry, one has to come to the conclusion that this is a chance of a lifetime. Critics are sceptical as ice class tonnage has increased rapidly during the past five years and some are afraid of overtonnage. Charter rates are therefore expected to be somewhat lower in the coming years until supply and demand are in balance again. It must be said though that TEN has built up a reputation of being one of the leaders in ice-class and also of knowing how to keep costs under control. I think that the fears are overrated and that at the current valuation, the potential rewards outweigh the company's risk profile and I therefore consider this stock a very attractive one. I add Tsakos Energy Navigation to my list of stock picks at a price of USD 63.50 with a one-year price target of USD 90.
At the time of writing, the author did not have a position in the above-mentioned stock.

Fiat target price reached for the year, but holding on...

Just a short post to say that Fiat's one year target price of EUR 19.33 has been reached, but since this is a stock that - as mentioned in my previous post on the company - is supposed to double in three years, I will not cash in on this one. Still too much upward potential, in my opinion. Keep following this one! As I write, gold has broken through the 667 resistance and the picture for the miners looks much brighter now as well. All & all, it sounds like a good time to take a holiday.

Iberia target price reached

Two months ago, I mentioned that Iberia Lineas de Aereas de España SA, Iberia in short, was undervalued and that the company's turnaround would be rewarded shortly. The price target of EUR 3.30 has now been reached and I think the stock is sufficiently valued at a forward p/e of 18 (assuming the median estimate EPS of 0.18, which I think should be feasible). Iberia presented a significantly improved load factor over 2006 and shows good results on long haul flights whilst domestic flights have been reduced substantially. Iberia expects the more profitable long haul flights to make up 42% of total revenues, versus 32% in 2004. This will happen at the cost of domestic flights, with medium haul flights expecting to be stable. Impressively, the gap with Air France on long haul flights from Europe to Latin America widens and it is more and more likely that its target of a 23% market share is going to be met. Considering all the above and especially keeping in mind the forward p/e of 18 based on current estimates, I would advise to hold the stock with the previous price target of EUR 3.30 as a stoploss.

Fiat Group share price to double within three years?

I cannot hide the fact that I've always had a love for Italian cars. Whereas colleagues tend to go for Volvos, BMWs or Audis, I have always driven Italian cars and I am not planning to change. In December 2005, I recall having mentioned that three car makers I considered good to have in one's portfolio: Toyota because of it's strong position in the US market and innovation in green technologies (which I think have a great future in this industry), Tata Motors because of its position in the Indian market - which is a real growth market - and Fiat, for the simple reason that the company seems to crawl out of its financial pit. Whilst Fiat only launched a couple of interesting new models in 2006, the Sedici, the Alfa Romeo Spider and the Alfa Romeo 159 Sportwagon and the New Ducato, 2007 looks much more promising. With the launch of the Fiat Bravo, Linea and 500 next to the Alfa Romeo 159 Crosswagon, the 8C Competizione and the New Scudo being planned, 2007 is certainly going to be a critical year in the company's latest business plan, presented last November. The four-year plan included predictions on the number of worldwide car registrations. Lancia is expected to be the fastest growing brand in the Fiat Group, but needless to mention that the bulk of the Group's growth comes from the Fiat brand, which already makes up some 70% of the Group's car registrations. The key figure is the expected growth of 65% in worldwide Fiat Group car registrations, which I would say is at the least ambitious. This growth is expected to come mainly from China & India (2010/2006 =+825%), Russia (to 130k units from scratch), Turkey (+91%) and Western Europe (+43%). It is no secret that the car industry is very volatile, with high fluctuations in market shares. This explains why a 43% growth in Western Europe may actually be feasible as it only represents a market share increase from 8% to 11%. Knowing that Fiat holds quite a strong position in many of its key growth markets, growth should certainly be very healthy in the coming years. The above is reflected in the company's financial targets: Group revenues are to increase by 7.6% y/o/y. As if that is not enough, EBITDA is expected to increase from Eur 3.6bn in 2005 to Eur 8.6bn in 2010! This means an increase of 139%! Now, this is all very nice and very ambitious but these are simply targets set by the company itself and give no reason to believe that these targets are actually going to be met. But the thing that does give me confidence is the fact that the financial improvements made in 2005 and 2006 are to be admired, especially when it comes to improvements of the bottomline. Today, Fiat S.p.A. trades at Eur 14.50. I am of the opinion that the Fiat share price could double in three years (certainly beats putting the money in your bank account), even if actual results are somewhat shy of current targets. EPS should reach at least Eur 2.50 in 2010.

Iberia's credible business model

Sometimes you come across these companies which you almost instantly develop a feeling of admiration for, simply because of their business model. One of those companies for me is Iberia. Iberia Lineas Aereas de Espana S.A. - as it's officially called - has had three difficult years, with competition getting stronger and stronger, especially on domestic and medium haul flights. Competition on medium haul flights (read: flights within Europe to or from Madrid) mainly comes from low cost carriers and Air France/KLM. Especially the low cost carriers are gaining market share rapidly and this has slightly eroded Iberia's market share as well as its margins. A similar thing is happening in the domestic market where SpanAir aims for market leadership in 2009 and high speed train operator AVE will also offer strong competition. In that situation, there are two things you can do: become a price fighter and see margins erode further with at best a stable market share or shift your focus to other markets. Well, Iberia has chosen to do both. The Spanish airline company has decided to increase its focus on long haul and aims to make Madrid the number one hub for flights to and from South America. The past two years, it has been rather successful and saw its position improve into taking over market leadership on Madrid to South America flights from Air France/KLM. Moving up from a current 18.7% towards a 23% market share in 2008 is considered 'feasible', despite tough competition from low-cost AirMadrid as well as Aerolineas Argentinas. In addition to improving its market share on these Atlantic flights, Iberia is also helped by an improving economic situation in South America, which leads to a healthy increase in air traffic. At the same time, Iberia set up its own low cost airline company 'ClickAir' in February this year. Another factor one should take into account is fuel prices. The expectation for fuel prices in 2007 is certainly more favourable than the 2006 situation, which should have a positive effect on corporate earnings. The company's plans to focus on profitability before topline growth - through an increase in business class tickets and self check-in and savings in personnel cost - should create some extra shareholder value. This has led analysts to be very positive about EPS estimates for 2007, which are expected to double. Now one could say that the stock is not undervalued at this time, which is probably true. But against this, the strategy of changing its corporate focus whilst improving profitability is one that certainly seems to pay off. I would therefore still recommend this stock at its current price of Eur 2.81, strongly influenced by its credible business model as well as by recent strong rumours on Lufthansa interests in Iberia. Update: Businessweek reports that AirMadrid has just seen its licence suspended by Spain's Civil Aviation authority, leaving thousands of passengers stranded.