Euroseas (ESEA) is an ocean shipping services company with worldwide operations. The maritime shipping company has a fleet of 16 vessels that transport dry-bulk and refrigerated cargoes. I am bullish on the stock.
Earnings Review
Euroseas beat its fourth-quarter revenue target by $844k, showing significant strength across the board as it has for most of the past few years.
A solid coverage rate (contracted days) of 98.5% is what bolstered the firm’s performance during 2021, as EBITDA reached $52.7 million. Euroseas’ management expects its convergence rate to drop to 92% in 2022; however, its EBITDA is expected to more than double to $113.1 in the year ahead.
The Greek maritime firm re-invested heavily during 2021, which explains why we could potentially see its EBITDA surge to the $113.1 million mark. In January, Euroseas ordered another two newly built eco ships worth $43 million each; this adds to its two eco-acquisitions in 2021.
The firm’s tremendous expansion means that it’s scaling rapidly and, in turn, adding noteworthy value to its balance sheet.
From an accounting vantage point, Euroseas is on good grounds to provide staggering returns in 2022, assuming its growth is sustained. The company doesn’t have any excess accruals, meaning that its cash flows are coming in stronger than its net income, which suggests that the firm may have recognized its previous expenses faster than it has recognized its income.
Furthermore, Euroseas has a Beneish M-Score of -2.696, suggesting that the firm has recognized its earnings conservatively of late and that it may report a surprise to the upside in its following quarters.
Fundamentals
Even though there has been a significant shock to the global system amid the Russia-Ukraine tensions, it’s still estimated that global GDP will grow by 4.4% during the year as consumer sentiment remains robust in comparison to previous years.
Euroseas will benefit from consistent consumer spending but may face some stumbling blocks from continued port congestion and rising fuel prices. However, this could be curtailed by growing containership demand, meaning that Euroseas is well hedged against most broad-based systemic headwinds.
The stock provides high-quality value to its investors. During the past 12-months, Euroseas’ return on equity was 76.5%, and assets grew by 100%, suggesting that we’re looking at a stock with phenomenal intrinsic growth.
Valuation
ESEA stock has slowed down during the past six months as it has drawn down by nearly 15% during the period. I believe Euroseas stock is back in undervalued territory as its valuation metrics leave much to be optimistic about.
The stock is trading at a GAAP P/E ratio of 4.4, with a TTM PEG ratio of only 0.005, based on EPS growth of 861% in the past year. In essence, this means that in the past year, the company’s earnings have grown over 195x more than its current earnings multiple.
Additionally, the firm’s P/E ratio is trading at a 79% discount relative to its sector peers, conveying that we may be looking at a “best-in-class” stock here.
I see tremendous potential for Euroseas’ stock, and I think its price retreat during the past six months has been down to investors cashing out on their profits.
Wall Street’s Take
Turning to Wall Street, Euroseas has a Moderate Buy consensus rating, based on two Buys assigned in the past three months.
The average ESEA stock price target of $51.50 implies 96.6% upside potential.
Concluding Thoughts
ESEA stock ticks all the boxes at the moment. The firm has expanded rapidly during 2021 and is well aligned to double its EBITDA this year. I believe its stock is undervalued and not yet priced by market participants, leaving investors with an arbitrage opportunity.
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