Scorpio Tankers has been on fire lately. In the past six months alone, the company’s stock price has rocketed 43.5%, reaching $56.73 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Scorpio Tankers, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is Scorpio Tankers Not Exciting?
We’re happy investors have made money, but we don't have much confidence in Scorpio Tankers. Here are three reasons we avoid STNG and a stock we'd rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Scorpio Tankers’s demand was weak and its revenue declined by 2.9% per year. This was below our standards and signals it’s a lower quality business.
2. Decline in total vessels Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Scorpio Tankers, our preferred volume metric is total vessels). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Scorpio Tankers’s total vessels came in at 99 in the latest quarter, and over the last two years, averaged 5.6% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Scorpio Tankers might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Scorpio Tankers’s EPS grew at an unimpressive 6.9% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 2.9% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.
Final Judgment
Scorpio Tankers isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 9.5× forward P/E (or $56.73 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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