Once In A Career Short Opportunity: Shipbuilder Valuations

Takeaway: There currently appears to be a once in a career opportunity to short the shipbuilding cycle. Valuation gains in the boom support that view.

 

Shipbuilder Market Values:  Once In A Career Short Opportunity

  • Mature, Cyclical Industry:  Shipbuilding is a mature, highly cyclical industry.  While the ships have evolved over the years, the nature of the market has not. 
  • Valuation Bubble:  The enterprise value for the four largest South Korean shipbuilders increased over 4x from 2005 to today’s levels, passing a 7x increase along the way.  In mature, cyclical industries, that alone is a significant warning sign.  Samsung Heavy is up 700%-800% from its 1 average share price.  Our cyclically adjusted valuation suggests significant downside from current levels.
  • Falling Utilization:  As deliveries drop steadily in coming years, shipyards will face headwinds not only from reduced capacity utilization, but also from intense price competition and low customer profitability.
  • Once in a Career Opportunity:  Shorting the shipbuilders is an opportunity that only comes around once every 30 years or so.  Assuming our readers retire at a reasonable age, this may be their only opportunity to participate in one of the great capital equipment cycles. 
  • 2035 to 2042:  For speculators who are still trading cyclicals in a few decades, 2035 should be a good buying opportunity for shipyards (most likely Chinese shipyards), when the next replacement cycle is likely to begin.  

 

Once In A Career Short Opportunity: Shipbuilder Valuations - 1

 

 

Long-term View Suggests Short Opportunity

 

Once In A Career Short Opportunity: Shipbuilder Valuations - 2


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