After StealthGas Inc.’s (NASDAQ:GASS) third-quarter financial results, the stock was inexpensive. Furthermore, things were looking positive for the newly converted pure LPG company since the stock had just come off a convincing Q3 earnings beat supported by strong forward-looking expectations at the time. But, if we look ahead about three months and take into consideration StealthGas’ most recent fourth quarter earnings (where the shipping company once again recorded a solid $0.28 earnings beat), shares are still essentially selling at the same price ($2.60 approx.) as when we started 2023.

From a technical perspective, the issue is that the longer shares trade at low levels, the more overhead resistance shares will eventually need to overcome if indeed a rally can ever take hold in this area. A big dividend, which is frequently the norm in shipping businesses, cannot be collected by investors while they wait for a probable up move in this situation. Although management has suggested share buybacks as a way to capitalize on the low share price, we prefer to receive dividends from our value stocks because it has repeatedly been demonstrated that dividends are considerably less “opportunistic” than share buybacks.

Q4 Results

Due to the impressive Q4 results print, the full fiscal year’s net profit came in at $34.3 million. This indicates that the company’s trailing GAAP earnings multiple is a very attractive 2.97 (current market capitalization is $102.0 million). It is sufficient to say that shares of StealthGas have rarely been cheaper from an earnings viewpoint, given the record net profit total in fiscal 2022 led on by the $7.7 million of reported income in Q4.

Though shares are more highly valued, as we can see below, forward-looking profits expectations have begun to dwindle. For instance, the fiscal 2023 $0.79 EPS estimate, if realized for the year, would represent an 18%+ contraction over fiscal 2020 net earnings. It has lost close to 12% of its value over the past 30 days alone. Also, there is a lot of veracity in these estimates because they are based on more chartered income and less vulnerability to spot prices.

Return on Investment

Present shareholders may decide to keep their positions and ride out this current stall in light of where the firm has come from in terms of earnings and the fact that the fiscal 2023 $0.79 EPS forecast still amounts to relatively low forward earnings multiple of 3.25. However, for the following reason, this choice might not be the best one.

We need to keep in mind that this is only one side of the valuation debate when a cheap firm like StealthGas is reporting earnings and creating cash flow on top of that. In addition to this and taking capital allocation into account, investors need to understand the potential future returns they may expect and the amount of investment the company will need to make in order to realize those returns.

So, we must examine the return on capital percentage for StealthGas, which is obtained using the following formula.

Working capital is current assets less current liabilities, while net fixed assets are StealthGas’ net property, plant, and equipment. Operational profit is calculated as operating profit/(net fixed assets + working capital) (Not including short-term debt as well as cash & investments in the calculation). As a result, when we enter the figures from StealthGas’ most recent financial statements, the following outcome is obtained.

Return on Capital is equal to $36.2 / $628.5 – ($22.4 – $26.5)

= 36.2/628.5 = 5.76%

To sum up, even if we round this result to 6%, investors must consider StealthGas’ ROC in light of the company’s lack of a dividend payment. This indicates that actual improvements may be challenging to accomplish here, especially over the long term if inflation remains strong and continues to run at high single-digit percentages. For this reason, we need to see some stabilization of those forward-looking earnings expectations in the coming weeks. Otherwise, before investors start investing aggressively once more, shares might quickly sweep back down to the $2 level.

Conclusion

In conclusion, despite StealthGas reporting strong fourth-quarter financial results, forward-looking earnings expectations have started to decline, indicating a decline in earnings in fiscal 2023. See what Q1 has in store.

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