Matson, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Matson, Inc. is a leading provider of ocean transportation and logistics services, primarily operating in the Pacific, with a focus on Hawaii, Alaska, and China.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Matson’s business is centered around providing critical shipping services to remote and island-based communities. This creates a niche market where their expertise in handling unique logistics challenges offers a competitive edge. They are among the few companies providing this level of service.

Business Explanation

Matson operates through two primary segments:

  • Ocean Transportation: This segment provides cargo transportation services via ocean vessels. Key routes include Hawaii, Alaska, and China, involving a mix of containers, automobiles, and breakbulk cargo. Their Hawaii service is a lifeline for the islands, delivering the majority of goods to the state.
  • Logistics: This segment focuses on providing a range of logistics services such as supply chain management, freight forwarding, and warehousing. These services are crucial for connecting goods with customers, especially to and from island communities.

Competitive Landscape

Matson’s competitive landscape is unique due to its specialized services. In the Ocean Transportation segment:

  • Matson has established a strong reputation in the niche market of shipping goods to Hawaii, Alaska, and Guam, with barriers to entry due to the capital-intensive nature of this business. Their decades of experience gives them a significant advantage. However, increased competition for these regions from other firms has the potential to lower Matson’s market share and revenue.
  • While they serve several other markets in the Pacific, such as China, they don’t have a similar position there, due to increased competition and are much more prone to market conditions.

In the Logistics segment:

  • Matson is a mid-size provider in this space which has an increased competition in the industry, leading to decreased pricing power for the business and lower margins.
  • Most freight forwarding and other types of logistical businesses compete through pricing and technology, and their customer loyalty is usually lower, leading to more variable income streams.

What differentiates Matson is their focus on serving island communities with integrated logistics capabilities, including ocean transportation and related services. This gives them an ability to control most of the supply chain and offer unique services.

Financial Analysis

Here is a detailed overview of Matson’s financials, combining its latest 10Q reports with some information from the 2022 annual report and other investor materials:

Revenue Analysis:

  • Overall Revenue: Matson’s overall revenue has shown growth from 2020-2022, from $2.37B to $3.58B. However, this is mostly from the surge during the supply chain issues of the pandemic, and has dropped to $3.09B in 2023 and $1.69B for the first six months of 2024. This volatility is because of the nature of the industry and can be seen throughout the financials.

  • Ocean Transportation: The Ocean Transportation segment, particularly the Hawaii and Alaska routes, has a high revenue share, but the recent volume slowdowns in 2023 have impacted this section, with revenue dropping by 8% YoY.

  • Logistics Revenue Logistics grew substantially in 2022, with a 32% increase in total sales to $698M, but has shown a similar decline YoY, with a 15% decrease in sales YoY. The company has reported that this segment has improved in the recent periods but is still lower than the overall market.

Profitability Analysis

  • Operating Income: Operating income has followed revenue in terms of large gains during the pandemic and declines in 2023 and 2024, and is tied to the industry. The company needs to reduce expenses to get back to historic profits, but that could be challenging.

  • Profit Margins: Operating profit margin was 17% in 2022. Since then, increased costs have put pressure on margins. In 2023 this has gone down to 11.8%, and 10.4% for the last six months of 2024. The margins have also showed instability, being impacted by multiple factors including but not limited to the rise of fuel prices, inflation, and other market forces.

  • Net Income: Net income was $826M in 2022, and it has dropped to 388M and 146M in 2023 and YTD 2024 respectively, indicating increased pressure on the profitability of the business.

Balance Sheet Analysis

  • Current Assets: The company has a good liquidity position in the current assets section, with over $1.4B in current assets and a current ratio of 2.3, signifying good operational liquidity.
  • Debt: Matson utilizes debt as a way to leverage the business, specifically through asset backed funding. At the end of Q1 2024, it has around $1.7B in debt, so this figure should be monitored. However, the company also has a good debt-to-equity ratio of ~1, indicating the company is not overleveraged.
  • Cash Flow: The company had a negative CFO in the past couple quarters, which is a significant concern that warrants further monitoring.

Moat Rating: 2 / 5

Matson has a narrow moat mainly due to the following factors:

  • Niche Market Leadership: Matson holds a strong position in the Hawaiian and Alaskan routes and enjoys strong relationships with customers and port authorities in these regions, giving them significant power and influence in the market.
  • Geographic Advantage: They operate mostly in islands in the Pacific, a space where few others provide similar services, and where there is a consistent demand for their transportation and logistical needs.
  • Intangible Assets: The company has a robust reputation in their core markets that has been build up for over a hundred years, creating a brand that has a competitive advantage.

However, their competitive advantage isn’t strong enough to rate it much higher than a 2 for the following reasons:

  • Commoditized Nature: While they have some barriers, the services they provide in logistics and shipping can be replicated by other companies with enough effort and capital.
  • Growing Competition: In several markets, including the transpacific market, they have shown signs of increased competition which can lead to lower prices and less demand.
  • Low Pricing Power Ultimately, the services they offer, particularly in logistics, are commoditized and they do not have much power in dictating prices for that service.
  • External Factors Affecting Business: Their business is highly influenced by external market forces such as inflation, rising fuel costs, general economic downturn, and other external sources, greatly diminishing their ability to manage the company and maintain consistent profitability.

Risk Analysis

Several risks can affect Matson’s moat and business:

  • Increased Competition: As markets become saturated, new entrants or expansion of existing competitors in their core markets could negatively impact their share.
  • Economic Downturns: The sensitivity of shipping and logistics services to fluctuations in economic activity means that a recession could greatly reduce revenues.
  • Fuel Costs: As a shipping company, high fuel costs have a large impact on their bottom line, directly impacting the cost of their services and negatively impacting their operating profits.
  • Labor Issues: Their contracts have a heavy reliance on unions, and their labor costs are higher than other shipping companies.
  • Geopolitical Risks: Their exposure in international markets increases their risk, especially as trade wars and geopolitical uncertainties could negatively impact business volumes and revenue.
  • Cybersecurity Risk: Matson’s operations relies heavily on technology, thereby facing an increased risk of cybersecurity attacks.

Business Resilience

Matson has some elements of resilience:

  • Established Relationships: Their long-term ties with island communities and their unique expertise can make them very important in their supply chains and maintain demand in these regions.
  • Diversified Operations: They are involved in various markets, and logistics as well as other business segments means they are not overly dependent on a single revenue stream.
  • Fleet Modernization: Their ongoing efforts to improve their fleet and services with more fuel-efficient ships will lower costs in the long run.

However, their low pricing power, along with a highly volatile business environment and external factors are likely to put pressure on their business model in the near future.

Understandability Rating: 2/5

Matson’s business model has a low level of complexity as it focuses on a few specific services and the company’s segments are pretty well defined. However, forecasting their revenues and profits, due to the volatile nature of the industry and their financials, is complex to understand. Therefore, a 2/5 rating seems appropriate.

Balance Sheet Health: 4/5

Matson has a relatively strong financial position. Their liquidity is good, debt is relatively low, and they are consistently generating profits. However, their recent decline in revenue and profitability paired with their cash flow concerns warrants future monitoring, but despite that they still maintain a good financial position. Therefore, a 4/5 rating seems appropriate.

Additional Notes

In their most recent earnings call (Q1 2024), Matson management reiterated the impacts of the ongoing volume slowdown and how they are working on strategies to improve profitability, but gave no guidance or indication on a full recovery to previous highs. They also talked about their focus on lowering operational costs in the future, especially by decommissioning older ships and replacing them with newer, more efficient ships, which is expected to generate higher profit margins in the long run. However, they still expect earnings for 2024 to be down when compared to 2022 and 2023. They expect Q2 to be the worst, and a gradual improvement throughout the rest of the year. Their investment into LNG (Liquified Natural Gas) ships will help them with their fuel costs. Their debt is almost entirely due in 2027, giving them enough time to improve their balance sheet. Their outlook on the logistics segment is improving slowly. The company maintains a conservative approach to investing. The company reported a slowdown in Transpacific demand, which they expect to remain under pressure. The company’s management also mentioned their focus on improving their customer experience and providing integrated solutions. Finally, the company talked about how they are improving their relationship with governmental agencies which will allow them to bid on more contracts.

In conclusion, while Matson has established a niche market with a history of strong profitability, it is not invulnerable to outside factors and increased competition. Their financial situation is good currently, but requires continuous monitoring. Investors should carefully look at the company’s historical performance, its current trends and recent results, their debt and leverage, and, most importantly, the external economic climate to consider whether this business is a good long-term investment.