Given the state of the general stock market this morning, it’s no surprise to see the Clarkson (LSE: CKN) share price down nearly 7% today, as I write. I reckon three things could be affecting the shipping services stock.
First, it’s probably dropping because of general uncertainties and sentiment about the COVID-19 coronavirus and how the outbreak might affect the world economy. Second, shares often fall on the day a company releases its full-year results report. Unless there’s outstanding and unexpected good news in the report, falling on the day is often a ‘thing’.
And the third possibility is that the report may contain some negative news that the market wasn’t expecting or which wasn’t already baked into the share price. Let’s dig in to find out.
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A short-term hit to business
There is indeed a negative. Chief executive Andi Case said in the report that Covid-19 will “impact” the firm’s first-half performance in 2020. So, there are no ifs or buts about that. The coronavirus is causing real economic damage to companies such as Clarkson. This makes me believe the stock market is being rational with its bearish recent moves.
However, Case goes on to say that the company started 2020 with a stronger order book than the year before. And over the medium term, he reckons the “environmental regulatory drivers and supply demand dynamics in the shipping industry are favourable” and he has “confidence” in the firm’s prospects.
But I reckon the company’s niche in the market is highly cyclical. Clarkson says its integrated services and investment banking capabilities to the shipping and offshore markets facilitate global trade. And to me, that means the company’s fortunes are dependent on global trade and the entrepreneurial efforts of others. In that respect, its business reminds me of big banks such as Lloyds, Barclays and HSBC. These also facilitate the business of others.
Good figures
For what it’s worth, in 2019, revenue rose 7.5% compared to the prior year and underlying earnings per share increased by 13%. The directors pushed up the total dividend for the year by 4%, the 17th consecutive dividend rise. That’s a great achievement. But I wouldn’t look at Clarkson as a dividend-led investment and buy the stock purely to harvest that income stream.
The reason is that although the share price has risen a lot over the past 17 years, it’s been moving essentially sideways for the past six or so. And I reckon that’s probably happened because Clarkson has an over-valuation problem. Indeed, with the share price near 2,275p, the forward-looking earnings multiple is just under 18 for 2020 and the anticipated dividend yield is 3.6%.
Meanwhile, City analysts have pencilled in a low, double-figure percentage increase in earnings for the current trading year. But I reckon if a global downturn really gains traction, revised, lower forecasts could leave the valuation looking even loftier. In a scenario like that, I can only imagine the share price moving lower.
My conclusion is the same as it was a year ago: I’d rather invest in a FTSE 250 tracker fund than in Clarkson.
