Over the years we have worked with numerous marine transport companies, and have found the industry in general to be both interesting and, from time to time, significantly over- or undervalued. One thing cannot be denied: the largest method of intercontinental transport is on the oceans and seas. According to Yahoo! Finance, marine transportation is one of the “industries on the move” these days: http://biz.yahoo.com/ic/775.html. Not surprising, and some of the gains are impressive.
Putting aside passenger lines, which are largely recreational, there are basically three large international categories of marine transport companies: (1) tanker companies, which carry “wet” cargoes that are often energy-related, as in crude oil or refined petroleum products, but could also be cooking oil or a variety of other liquid cargoes; (2) dry-bulk companies, which, as the name implies, carry dry cargoes of a wide variety, such as grains, scrap metals, coal, or ores; and (3) container companies, which carry anything that can be put into a standard freight container. There are also some smaller categories, such as companies that carry compressed gases like LNG; or companies that operate vessels with a limited geographic range, such as barges, tugboats and riverboats of various kinds.
Most of the publicly listed marine transport companies are in one (or sometimes more) of the 3 main categories: tankers, dry-bulk, or containers. The industry is further divided into companies that lease their vessels for lengthy periods (long-term time charterers) and those that lease their vessels for shorter times or even for short terms or for individual trips, pricing their services on the spot market, which fluctuates depending on demand.
Like the real estate market, the marine transport industry tends to follow boom-and-bust patterns. In good times they over-build new vessels, which tends to create an over-supply of carrying capacity that sends rates down. Put simply, when there are lots of carriers with empty ships, rates go down. We seem to be just coming off the bottom of one of those cycles, when “new-buildings” flooded the markets based on the boom shipping rates that prevailed at the beginning to the middle of the last decade.
Also like the real estate industry, when there is an over-supply that causes a rate plunge, some of the weaker companies can be forced out of business, which may create an even larger surplus of vessels as fleets are liquidated. At the same time, there tends to be an increase in retiring older vessels, which are typically stripped and moored off countries like Bangladesh, where they are eventually cut up for scrap if all goes according to plan.
It was not until fairly recently that many marine transport companies were publicly traded. Most were privately held, many of them by Greek or Italian or Scandinavian owners, frequently multi-generational families. But the large US investment banks “discovered” shipping companies as major users of capital, and flooded the industry with cash. Then traditional commercial banks doubled up the cash available with debt leverage, since the equity spigots were flowing to make the balance-sheet ratios work. One of the main results has been that there are now a wide variety of small-cap shipping companies whose shares may well be of interest to buyers familiar with the vectors that affect the business.
We do not recommend stocks; we just write about companies we find interesting. Do your own diligence. None of these companies is a client of the publisher of this blog.
One company that pops up on lists pretty regularly is Athens-based Diana Shipping (NYSE: DSX; http://www.dianashippinginc.com/). With its relatively conservative balance sheet, Diana’s stock has more than doubled since December 2008, when it hit a low of $7.24 — as of Friday, shares closed at $16.09, vs a 52-week high of $19.00, and trading volume exceeds 2 million shares per day. Diana is a dry-bulk company, and anyone interested in dry-bulk shipping should become familiar with the “Baltic Dry Index” or BDI, which publishes rates for cargoes of various sizes daily. A recent article in thestreet.com labels Diana a “winner,” quoting Cantor Fitzgerald analyst Natasha Boyden on the effects of heavy iron-ore buying in India as one of the influences: http://www.thestreet.com/_yahoo/story/10655224/1/dry-bulk-shipping-winners-genco-diana.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA.
The other winner mentioned in that Yahoo! Finance article is New York-based Genco Shipping & Trading (NYSE: GNK; http://www.gencoshipping.com/), a newish company (2004) that operates 30+ ships (the largest of them are all named after Roman emperors) in the dry-bulk trade. As of September 30, 2009, their earnings stood at $3.62 per share, although Genco used more cash in “investing activities” than it generated from operations, which is a good indicator that they see good deals afloat. Their fleet is a combination of new and used vessels, with a predilection for sister ships (which are generally thought to simplify maintenance issues). GNK shares closed Friday at $25.68 on average volume of nearly 2 million shares, and a market cap of about $815 million.
Bermuda-based Knightsbridge Tankers (Nasdaq: VLCCF; http://www.knightsbridgetankers.com/) is on the “wet” side of the business, as the name indicates. It is much smaller than Diana or Genco, and owns 6 vessels; it had earned $0.74 per share as of 9-30-09, and the balance sheet showed a precipitous drop in cash, especially considering its short-term liabilities (look for yourself). At any rate, the shares closed Friday at $14.96, down from a year-high of $17.16, but up $0.93 on the day, on volume of 111,000 shares and a market cap of about $256 million.
Hong Kong-based Seaspan Corporation (NYSE: SSW; http://www.seaspancorp.com/) is a container-ship operator which announced the delivery of its 43rd vessel on January 8 (it has 25 more on order), which are typically chartered for long periods at fixed rates to big shipping companies like Maersk, Hapag-Lloyd and Mitsui. Seaspan reported revenue for 9-30-09 of $207 million, actually a significant increase over 2008 (unusual in this industry), and says it has arranged for all the capital needed to complete the build-out of its intended fleet. SSW shares closed Friday at $10.28, with a 52-week high of $13.07, but up $0.48 or nearly 5% on the day on heavier-than-normal volume of 477,000 shares. Its market cap is just shy of $700 million, but one should endeavor to understand its issuance of preferred shares prior to making an investment decision.
There are many publicly listed shipping companies, but we will close this article with a glance at Athens-based Euroseas (Nasdaq: ESEA; http://www.euroseas.gr/), with a fleet of 15 vessels, 6 of which are dry-bulk carriers, with the remainder being container vessels, with a clear preference for long-term charter deals. ESEA is much smaller than the other companies in this article, with a market cap as of Jan 8 of $133 million. Its 9-month revenues of $47 million were just higher than its previous-year net earnings for the same period ($43 million), with profits for the 2009 9 months of $700,000 — but net income for the third quarter by itself was $2.2 million, which means things were trending up fairly strongly at least last fall. ESEA shares closed Friday at $4.32 vs a year-high of $6.31 on average daily volume of 110,000 shares — but the shares were up $0.26 on the day, a gain of more than 6%, which reflects a gain in enthusiasm for the company and possibly the industry, at least on January 8, 2010.