Frontline Ltd.: Minor Stock Progress, Uncertain Company Outlook

Posted Feb 2nd 2010 12:00PM by Joseph Lazzaro
Filed under: Stocks to Buy

Ship leasor Frontline Ltd.'s (FRO) stock has risen substantially since since the initial recommendation on April 28, 2009, at $19.17, but the company's longer-term outlook is still giving institutional investors the jitters. It's a close call, but I'm reiterating the buy rating.

Dayrates for very large crude containers and Suezmax tankers -- expected to firm late in 2009 -- did not, due to a large increase in the worldwide fleet and production cuts by OPEC. The First Call FY2009/FY2010 EPS estimates for Frontline are $1.34 to $1.65.

Further, if global oil demand does not rebound in the two quarters ahead, Frontline's revenue will be affected, but counting on global oil demand declining for three years in a row just seems to be a stretch. Even so, storm clouds regarding a slow-down in U.S. GDP in the second half of 2010 on tepid job growth may offset oil consumption gains in Asia. To guard against another swoon in Frontline's revenue, I've raised the sell/stop loss to cost at $19.20 from $7, eliminating the trade's risk.

Technically, as noted, Frontline's stock has trended up, but it's been a choppy rise to say the least. The jump to $34 earlier this month looks speculative, and although FRO has held above the key 50-day moving average, a break below would help confirm the uncertain 2010 outlook. Hence the raised sell/stop loss.

2010 Outlook: Frontline is a long-term play. Don't buy the stock if you're looking to sell FRO within the year, as the risk/reward is not favorable.

Stock Analysis: Frontline Ltd. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in FRO. Under any circumstance, don't buy more than 25% of your FRO position before April 2010. Revised sell/stop loss if you bought shares in this company: $19.20.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: FRO, Frontline Ltd.