TBS International: Underwater, but not Sinking

TBS International Limited (TBSI) is trading at levels not seen since the beginning of 2007.  Its hard to believe that this company, expected to earn $5.76 per share, is now below $9.00 per share.  The stock actually came public at $10.00 back in June of 2005 but took about two years before mounting its sharp rally which peaked above $71.

If misery loves company, then TBSI should appreciate the fact that many of its peers are in the same boat (pardon the pun).  As fears of a worldwide recession materialize, the demand for shipping is expected to deteriorate.  Exports of finished goods will grow at slower rates, and demand for steel, grain, fuel, and other raw materials could be sharply lower than expectations.  While many shippers have their vessels locked into long-term contracts, there is a lingering question of what will happen once those contracts run out.

TBSI actually operates from a different business model than many of its peers.  The company seeks to serve as a niche provider to clients offering flexible and company specific solutions to transportation needs.  As such, TBSI has built a fleet that includes a large assortment of different size vessels in order to meet varying needs of clients.  The company continues to build out its arsenal of ships by purchasing new and used vessels continually.  In the last quarter alone, the company has taken delivery of two handymax ships and announced the acquisition of another vessel which will be delivered late this year.

Because of its aggressive pace of acquisitions, investors are shunning the stock, expecting overcapacity in the industry to lead to lower productivity for all parties involved.  TBS is certainly not immune to the issues of the industry, but looking at the company’s assets it appears the market has swung too far on the side of caution.  The stock is currently trading at roughly 80% of book value meaning that if the company were to shut down tomorrow and liquidate its assets, investors would come away with a 25% increase.

Now certainly some of the assets may be carried at a higher value than true liquidation prices as accounting rules permit the firm to depreciate purchases across their useful lifespan.  It is also nearly certain that next year’s earnings will fall below the current record breaking estimate of $5.76 for 2008.  However, the market appears to be pricing in a strong chance that the company will simply shut down and discontinue operations.  This is simply not a likely scenario.

The management team is likely making some very wise strategic moves during this time of panic and crisis.  When capital assets like large ships are on sale, and shipyards have the capacity to manufacture or refit aging ships, one should take advantage of the opportunities.  Assuming that sometime during the next decade the demand for shipping will rise (which is almost certainly the case), and further assuming management does not take on too much of a debt load that cannot be serviced (currently debt is just 49% of equity), TBSI should survive this challenge and offer strong value to patient investors.

Disclosure: Author does not have a position in TBSI.

Comments

[poor&unempl...:]

The stock is currently trading at roughly 80% of book value meaning that if the company were to shut down tomorrow and liquidate its assets, investors would come away with a 25% increase.
++++++++++++++++++++++...

Do you really believe that those 20 year (plus) old vessels purchased less than six months ago are going to get $30 million or more if sold now?

S&P market is closely related to freight market. Freight down resale prices down. Those $30 million vessels may not get $3 million if the market do not recover.

2008 Nov 05 10:41 PM

[Zachary Sch...:]

Poor&unemployed,

you are right that the book value can differ significantly from market value of assets. However, not ALL of the ships have been purchased in the past 6 months. Many have been purchased years ago and have been depreciated (marked down) significantly.

My point is not that liquidating the firm would be good for investors, only that owning the stock has some safety at these levels because you have hard assets ALONG WITH the profitable business of shipping. There are definitely challenges in the industry, but the game is not over. We should see a rebound over the course of the next several quarters.

Thanks for the comment!
Zach
zachstocks.com

2008 Nov 06 09:24 AM

[buge:]

OK What I dont understand is how these shipping companies keep beating EPS estimates yet their prices still sink?? EXM just reported an EPS of like 2.7 when it was only estimated to be around 1.5 or so, but it's stock value has dropped since then

2008 Nov 06 10:10 AM

[Zachary Sch...:]

Investors are selling shares because they fear earnings are going to be much lower in the future. Many companies have long-term contracts with customers which allow them to make great profits during this quarter and possibly additional quarters down the road (depending on the company). However, the spot rate for daily use of such ships is sharply lower than we have seen in the past.

So once these long-term contracts expire the big question is whether the shippers will be able to negotiate new contracts at profitable levels. My expectation is that they will see profits decline from current levels, but not to the extent that the shippers will go out of business.

Hope that helps explain some of the dynamics in the market right now.

Thanks for the comment!
Zach
zachstocks.com

2008 Nov 06 11:10 AM

[poor&unempl...:]

Zach

Thanks for your comments. Very refreshing to see them.

Some of the wounds from 70's, 80's and 90's are still painful during cold financial winter as we are experiencing now.

www.moodyskmv.com/rese...

Check the financial history of B&H shipping companies (I think there were three of them and if my memory is not failing, Excel Maritime purchased the shell company of one of them. I could be mistaken) including COTCO in 90's, the BOD and strategies.

Good luck.

2008 Nov 07 08:04 PM