Excel Maritime Carriers: Set Up To Excel 105 comments
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What is up with the shipping industry? It went through the roof. Then it fell through the basement. Finally now it looks like it is set up to rebound. See chart of the SEA ETF below:
click to enlarge images
The shipping industry seems to have bottomed and risen. Look at the daily chart of the SEA ETF above for confirmation of this fact. There is a reverse head and shoulders formation denoted above by the ovals in the chart above (a strong bottom sign). Also interesting is the pennant formation. At the tip of the pennant the shipping industry should break either quickly up or down.
Given the current valuations of the shipping stocks and the previously pointed out reverse head and shoulders configuration, it seems likely the direction of the shipping industry stocks will be up. Further confirmation of this is provided the following facts:
- The Baltic Dry Index seems to have bottomed. It has been moving up, especially the capesize sub index.
- The iron ore price agreements for 2009 are rumored to be close to being signed. These are purportedly at a price about 40% less than the 2008 price. Do you think some manufacturers may be waiting for the new prices? Do you think this waiting may have cut into the demand for shipping in the recent past? China has let its stocks of both iron ore and coal dwindle to very low levels. They have to buy soon. Note: the price agreements are a yearly ritual between the big steel manufacturers and the big iron ore producers. Once the first agreement is signed, others tend to follow swiftly.
- Steel prices have steadied recently. This provides a better basis for the iron ore price negotiations.
- There is the infrastructure heavy stimulus package in China.
- There is the infrastructure heavy stimulus package in the US.
- The fact that the US market at the moment seems to be rising is helping all of this along.
There will likely be a spike up in amount of shipping done (and in the BDI) once the iron ore price agreements for 2009 are signed. Since port congestion and port fees have gone up in the last couple of years, larger ships are generally preferred by importers, especially big ones like China. Let’s take a look at which shippers are best equipped to take advantage of this. Below is a list of some of the shippers that have big ships:
My figures below are from the profile information on Yahoo Finance.
EXM: 4 Capesize, 14 Kamsarmax, 21 Panamax
DRYS: 5 Capesize, 31 Panamax
GNK: 5 Capesize, 6 Panamax
DSX: 13 Panamax
SB: 11 of a combination of Kamsarmax, Panamax, Post-Panamax
SBLK: 3 Capesize, 1 Panamax
NM: 1 Capesize, 5 Panamax
ESEA: 3 Panamax
Capesize is technically anything over 80,000 dwt, but generally they seem to be over 150,000 dwt.
Kamsarmax is about 82,000 dwt (the biggest ship that can fit into the biggest bauxite port, Kamsar, in Equatorial Guinea).
Panamax is about 65,000 dwt (the biggest ship that can fit through the Panama Canal), although generally ships between 65,000 and 79,999 are classified as Panamax.
As you can see, EXM is the clear big ship leader. A lot of the shipping these days is into and out of China, which has very congested ports with high port fees. This is the most important area of the coming big spike in shipping demand. EXM is the shipper best equipped to take advantage of the China trade. Somehow I think the Chinese likely know this.
Let’s look at the valuations now:
Note: The PE, FPE, and PEG data come from Yahoo Finance, with the exception of the DSX PEG, which I got from TD Ameritrade (I thought the PEG listed on Yahoo was likely incorrect). The other data come from TD Ameritrade. I am unsure about the FPE number for ESEA. This may be a Yahoo error (or not). It does seem out of place.
As of this writing (near the end of the day Thursday Jan. 8, 2009), EXM is at $8.70. EXM has butted up against resistance at about $9 before. It has even been a little bit higher. However, the pennant formation on EXM is tightening quickly. It appears to be heading for a break either up or down in the very near term.
For the reasons stated above for the entire dry bulk shipping industry, I think this break will be to the upside. If this happens, EXM should move quickly to at least $13.75, but it may move to even $16.30 in the very short term. A pennant formation of this type generally provides energy for a substantial, quick move to the up or downside. Certainly the shipping stocks are among the most undervalued stocks on the US exchanges. For EXM, the PE, FPE, Price to Book (what a value 0.12), and Price to Cash flow clearly lead the Dry Bulk industry.
As previously noted, EXM is ideally strategically equipped to take advantage of the spike in Chinese shipping to come soon. It is a great short term play. It is also in my mind the best long term play. With the credit markets in the shape they are in, few other shippers will be catching up to EXM’s size (i.e. adding ships) in the near future. This should give EXM a strong competitive edge as the world emerges from the recession next year. This stock has strong upside potential. DRYS and GNK are in a similar position. However, EXM and DRYS have a much better Price to Cash Flow ratio, while all three have similar Debt to Total Capital ratios. Good luck investing.
Disclosure: Author holds a long position in EXM
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This article has 105 comments:
P/E and other valuation ratios, both trailing and based on analyst expectations for 2009 are also meaningless. They reflect high rates achieved during the boom in the industry in the last couple of years.
Current rates are below break even for ship owners and, due to massive newbuildings coming this year, are not expected to rise significantly.
EXM is extremely leveraged company and market value of its fleet is below debt.
Bases on NAV, EXM and other bulkers are now probably the most overvalued stocks in the US markets.
1) Maritime shipping is an important business. Entry is not easy.
2) BDI rates are volatile. EXM business is built around AAA customers who sign long term contracts and need a reliable shipping resource. Getting your goods from point A to B in the promised 12 days is important o both customer and supplier. EXM has a reliable modern fleet. The BDI is not as important in the long term.
3) Many of the new ship yards are not coming on line. Consequently forecast overcapacity is not accurate.
4) EXM has 4 new ships scheduled for delivery. All have been prechartered and will provide positive cash flow.
5) The deep pocketed partners of this company will provide capital for future investment limiting EXM need to invest cash. Since the major owners are interested in dividends this should leave cash available.
6) Although the balance sheet has a heavy debt load it must be understood in the context of this industry. Investing in ships takes capital, often borrowed. The lenders understand this. If the value of the ships fall and the company violates debt covenants the lenders may view this as a technical default. As long as cash flows are continuing and the loan is current they will not foreclose. Think of the ship as a machine that generates revenue. As long as this continues what difference do the ship values make in the short run.
7) The world growth story may be slowed but not permanently impaired. EXM is well positioned to take part.
I own stock in EXM
While book value may not be exact, for many of these companies, book value is actually very conservative. That is because they purchased ships and carry the ships at cost less depreciated value. Since many of the ships have been depreciated to a much lower level (accounting) the book value is likely very close to economic value.
Thanks for the good article - best of luck with these names.
Zach
zachstocks.com
ole455: I realized when I wrote that the PE values were clearly a reflection of much higher BDI rates. I too thought these were somewhat meaningless. For that reason, I included the FPE values, which are the values currently being accepted by analysts and the companies for their projected earnings. EXM's FPE is the lowest in the list above. Apparently the company and the analysts think this company should perform well, even in the down market. The PEG is also indicative of likely future earnings. EXM is again among the leaders. As for the overcapacity you cite. The credit crisis seems to have put a big crimp in that. That was one of the points of the article. You obviously have your own view.
The article has three themes: 1) valuation, 2) good news that is looking better in the near term, 3) technical charting data strongly indicate a strong near term upward movement in the stock. You seem to have ingored the latter two items in your negative diatribe. Are you short this stock???
I hope we are all correct, and that this stock truly is undervalued by orders of magnitude more than it should be.
Additionally banks will be hesitant to make noise about broken covenants because they could end up with a lot less in the end than if they just stayed silent and prayed.
As long as a true depression doesn't hit, EXM should trade above $10 soon, and later much higher.
Order cancellation is clearly an issue for 2010 and beyond, but not for 2009. It's just too late to cancel. Orderbook for 2009 looked huge even before worldwide recession became apparent. Imagine the size of oversupply given the slowdown.
Current uptick in the rates is quite explainable and has always been reflected in freight futures (FFA) market. It's pretty clear that shipowners are not going to charter their ships at below operating cost level. However, in case of oversupply, the rates will not be able to stay for a prolonged time at a level, significantly higher than operating costs.
The only logical way to value dry bulk shipping companies is NAV. Above or below the market charters should also taking into consideration, of course. A dry bulk shipping company is, after all, just a set of ships. It's not really different from a close end fund in this sense. Some premium or discount to NAV is warranted for superior or inferior management, but it should be reasonable anyway. I just don't understand why a long-term investor would buy EXM (and most other bulkers for that matter) right now, if he could buy a dry bulk ship instead for the price three times lower.
I've been actively trading shipping stocks for several years and currently, PPS vs NAV for some of them is at all time high. Of course, am I shorting now.
As for the momentum and technical analysis, you are probably correct. I just mean longer term timeframe.
The news on EXM today indicates that Zacks, a highly repected analyst service, reaffirmed their earnings estimates for 2009. They see no huge problems on the horizon for EXM.
I agree a prolonged downturn would hurt EXM (all shippers). However, my current actions are predicated on my current thoughts about the length of the recession. If you are certain that the recession will be much longer and deeper (a depression) than most people believe, you are probably making the right call based on that belief. I think my analysis for a long term outlook on EXM is generally based on the more accepted beliefs about the length of the recession. We will have to see who turns out to be correct.
Then why would shipbuilding continue? Where is the economic incentive to enter the market?
SBLK reported that ship scrappings were higher in just the month of October than they were over the previous two years. DRYS walked away from deals to buy more ships. NM canceled contracts for new ships. They are not alone; you're not the only one who sees that dry bulk is not what it appeared to be a year ago.
That said, I agree that book value is overstated (not meaningless), earnings projections are a bit rosy, and that most of these companies are very leveraged. But they also have multi-year contracts for many of their ships generating good cash flow, and as long as their covenants aren't tied to closely to the values a very thin, distressed market sets for their ships, they may get by just fine.
Some of them will. Some of them won't. Better do your own research.
I wonder. Yahoo (uses S&P's CapitalIQ) lists it at 0.29 (0.30 with today's move), which puts it much closer to SBLK (0.34), NM (0.5) and ESEA (0.57). DRYS is in there too. Who's right? Guess I've got some research to do.
"Since the evaluations are done using the same metrics..."
Well... you have to be sure that the same person is making the same qualitative judgments across all of the compared companies. Further, you have to have some level of confidence in this person's ability to place consistent valuations on dissimilar assets; does s/he appropriately value a 15-year old Panamax relative to a 10-year old, or a different sized ship? What's important here is not that the book value is accurate, but that it's consistent within the group of compared companies. I'm having to rely on information I can't help but question.
"[EXM is] also less exposed to day rates for 2009 than DRYS."
Very important, not just for 2009 but for 2010, especially for those shippers with larger debt burdens like EXM and DRYS. If new charters are negotiated at times when the spot is as low as it is now, will they be able to service the debt? Yes, they have the largest fleets and could then benefit the most from an upturn in this market, but they're also the most leveraged and so in the most danger should rates not recover for some time.
I would love to see a comprehensive chart showing fleet utilization of each of the mentioned companies.
The most important thing is that a lot of companies, especially EXM, GNK and DRYS are in deep violation of loan covenants. The only company in the sector that solved this problem, for the time being, is EGLE. As a result of the agreement with lenders, it is now restricted from paying dividends. After this news hit the wires, the stock price of EGLE tumbled over 30%. For GNK and EXM, it's more difficult to reach such agreement, because market values of their fleets (without taking into consideration above the market charters) are actually below outstanding loans. The most difficult situation is, in my opinion, for EXM. Nordea bank, which is the lead lender of EXM, had significant losses on other bulkers, such as Britannia and more recently Armada. They could take tougher position.
I got interested in shippers based on a WSJ article:
online.wsj.com/article...
"A Street Longtimer Speaks"
The valuations were so attractive that I felt I'd be doing myself a disservice if I didn't at least nibble. I wished I continued to DCA down, but being new to this sector, and the horrendous fall in October/November, did not feel comfortable at the time with a larger exposure. I am becoming more confident as each day passes. Thanks again.
On Jan 09 10:50 AM David White wrote:
> Ricard: I am not sure it is undervalued by an order of magnitude.
> There are risks to the shipping business as ole455 pointed out. If
> you look out 2-3 years, it may be undervalued by an order of magnitude.
> I actually am most enthralled with the book value. It is clearly
> an overestimate in this market. However, with iron ore prices likely
> trending higer long term, EXM likely presents a huge long term value
> play. As long as it survives in the short term, this company looks
> great.
>
> The news on EXM today indicates that Zacks, a highly repected analyst
> service, reaffirmed their earnings estimates for 2009. They see no
> huge problems on the horizon for EXM.
Please provide your information sources. I'd like to read what you've been reading.
Interesting. Thank you for your contribution.
How about this:
I've been in tech since 2002, with the hope that it returns to 1/3 of its 2000 valuation within 10 years - this has easily been true of the major tech names, and I have done quite well with this position.
With shippers (and in my case EXM), I am looking for something similar - 1/3 of its high (around 20) with a 5-10% dividend within 3-5 years. That would justify its stock price today. Your thoughts?
> How about this:
>
> I've been in tech since 2002, with the hope that it returns to 1/3
> of its 2000 valuation within 10 years - this has easily been true
> of the major tech names, and I have done quite well with this position.
>
>
> With shippers (and in my case EXM), I am looking for something similar
> - 1/3 of its high (around 20) with a 5-10% dividend within 3-5 years.
> That would justify its stock price today. Your thoughts?
In ten years, anything is possible. I just beleive, that given current situation in the dry bulk market, EXM PPS, its NAV and all the risks involved, its clearly a sell. It will be a challange for this company even to survive. I have a bearish opinion regarding dry bulk industry, but in this sector, SBLK and DSX look significantly better. SBLK has manageable debt and above the market charters that signinificantly exceed its market cap. Some of its charterers might default of course, but its really another problem inherent to all bulkers. I beleive most of them will honor obligations. DSX has very little debt, so it at least it's going to survive.
I would buy one of these companies as a long-term investment.
I should also point out that your estimate for steel has neglected to account for the added metalurgical coal needed to make that steel.
I also did want to make a bigger point of EXM's Price to Book ratio. It means that EXM is trading at least a two fold discount to the other shippers listed based on book value. Unless you are going to insist that its management is supposedly 2 to 10 times worse than that of the other shippers listed, EXM deserves to move upward on book value alone. It also does well in earnings comparisons.
Further there was a comment above that EXM had several more capesize ships due to be put into service in 2009. However, the EXM Web site shows it has 6 ordered for 2010 (none due in 2009). I am currently thinking that the worst of the recession will be over by then.
Correction: EXM has 7 newbuild Capesize currently scheduled for delivery in 2010.
The other comment I'd like to add is that Yahoo's numbers are not always consistent. In fact, one common issue I've noticed quite a lot has to do with institutional ownership of a stock in excess of 100% .. Yahoo couldn't explain it and suggested I contact the information brokers directly. They never even bothered replying... Anyway ... Great stuff.....
jegan ;-)
DRYS: 4 new 2009 capesize, 1 new 2010 capesize
EXM: 1 new 2008 capesize, 7 new 2010 capseize
GNK: 4 new 2009 capesize
DSX: website shows no capesize ordered
SB: no website
SBLK: website shows no new orders for capesize
NM: 7 new capesize in Q3 and Q4 of 2009 (no wonder it went up so well today).
EGLE: no new capesize orders shown
The total for these shipping companies is 23 new capesize ordered for 2009 and 2010. There is one capesize for EXM for 2008 that I don't know the exact status of.
If a significant protion of the new capesize ships ole455 is citing are not being bought by these major shippers, I find it very hard to believe there will be a factor of 10 more coming into service in 2009 and 2010. Perhaps someone is counting Kamsarmax or Panamax as capesize also????
I did hear RIO was planning on getting its own shipping fleet. This will likely hurt shippers. Still EXM looks like a great buy in comparison to the other shippers. The capesize index was up about 20% today. Apparently it has gone up about 50% in the last week. It looks like it is heating back up. Most of the materials for use in the China infrastructure heavy stimulus package will likely need to be shipped in. That should benefit all of the large ship shippers for the next two years. Plus there may have been or are going to be some further cancellations in capesize orders. This will likely take care of the slack. Ole455 has his points. Still EXM is ideally positioned to benefit from the expected increase in China traffic due to the infrastructure build out. Would you rather contract for a ship that already exists, or would you prefer to contract for a ship that might exist by the time you needed it? I am pretty sure I know the way most managers would answer that one.
In my mind the bottom prices in the BDI are as much an illusion as the top prices. Somewhere in the middle will likely be where they gravitate to. EXM and others should make good profits at those levels. The Chinese, Indian,Brazilian, etc. economies are going to continue expanding quickly once the recession is over. EXM is set up to capitalize from all of this.
I decided to do a check of the Quick Ratios for the companies above. They are:
NM: 1.63
DRYS: 0.71
EXM: 0.45
GNK: 7.09
DSX: 0.45
SB: 3.07
SBLK: 0.41
ESEA: 3.69
EGLE: 2.55
The data is from TD Ameritrade. This does confirm OLE455's assertion that EXM (and others) could have short term problems paying their immediate debts. However, EXM has a much bigger excuse than other companies since it made a large acquisition recently. There are always extra costs associated with this. Also for this reason comparing EXM to the company it was 5 or more years ago is not applicable. Given that it must have had acquisition costs, it seems in a very competitive position relative to other shippers such as DRYS. Also DRYS's new capesize are being delivered mostly in 2009, when much of the recession will still be on going. EXM's new capesize ships are not due to be delivered until 2010. This should put EXM in the enviable position of having the right fleet at the right time. They should get many of the stimulus contracts from China in 2009 and 2010. Then they should get many "new growth" contracts in 2010 onward. DRYS will have a harder time contracting all of its capesize capacity in 2009. Further EXM is still supposed to be substantially profitable in 2009. It should be able to improve on its quick ratio during that time. It is unclear that DRYS will be able to do so.
I still think the chart indicators and the recent good news that call for a spike upward in EXM price in the very near term are likely going to turn out to be true.
As for the question above about a target price for EXM, the analysts' average one year target price for EXM is about $25. In the long term I think EXM will do much better. I believe iron ore prices will rise long term. This means ship building costs will also rise long term. In 5 years the cost to build one of EXM's ships seems likely to be twice or greater its current book price. If you think long term (and you agree with that iron ore assertion), EXM, which is trading at 1/8 its book value will be at 1/16 its book value then. It seems more likely to me that it will rise to be inline with its 2014 book value (or to at least 1/2 of its 2014 book value). With this thinking a roughly $10 EXM today would be a $80 to $150 EXM in 2014. This would be a good profit. With the current credit crisis it seems unlikely that there will be as many dry bulk carriers made as will be needed in the short term by the soon to be growing again economies. When they are contracted for again, iron ore will be more expensive. This will again leave EXM in a very competitive position.
thanx.
There is still massive amounts of ore, coal, grain, fertilizer, etc.. being shipped. The increase in demand for raw materials created a shortage of ships, and a bottleneck in ports trying to load and unload, the rates skyrocketed. In May, it cost more to ship a ton of ore from Brazil to China, than the cost of the ore itself. That is unsustainable, and it was unacceptable to Vale or the customer.
Now if the demand was going to bounce back soon to levels reached in 20008. then the big three miners would not be negotiating a 40% price cut for 2009. they would not be cutting production, and the steelmakers would not be shutting plants.
Also there is not a direct correlation between the price of iron ore and the price of shipping it. Obviously it is easier to get a higher price for shipping if the iron ore is more expensive. However, the two are not completely linked. My point about the 40% decline is that it should make China want to start buying again, especially with all of the infrastructure building that is already funded in China. Supposedly there will also be a large amount of infrastructure funded in the US. Both of these together should spur an increase in spot prices for shipping.
A second point was that the BDI was unnaturally depressed because the Chinese were essentially waiting for the lower 2009 iron ore prices before buying (in fact they have been essentially dictating them). Therefore the current low in the BDI is as much an abnormality as the previous high was. Since this seems to be correcting fairly quickly at the moment, there is good reason to believe the stock prices of the dry bulk shippers will go up in the near term.
As for the cancellations, I would tend to agree that the near term ones would be nearly impossible to cancel. However, many new build contracts are still being cancelled. This bodes well for the shipping companies future outlooks. It should take care of some of the excess capacity.
You do seem to have more information about the complete world fleets and activities than I do. I would appreciate it if you could tell me where this information is easily available.
It seems that I may have been ignorant of some details. However, the overall thrust of my article seems still to be correct. EXM (the combined EXM and QMAR) does seem to be a comparable company to DRYS. Yet it is trading at a substantial discount to DRYS (and at perhaps even more of a discount to other shippers). The charts do indicate an up move, as does the recent news. EXM was almost ignored today, while DRYS shot up. Because it hadn't been combined with QMAR at the time of the big shipping run up, it does not seem to be being viewed as a leader. However, I tend to think it has become one. It seems the market will likely begin to recognize this soon. Zacks seems to already be doing this. Robert Maltbie also wrote a nice article citing EXM as a likely huge gainer in January.
Also perhaps the charting evidence is the most compelling near term buy signal. The pennant formation looks like it has at most a few days to complete before the start of a sharp move (most likely upward).The fact that other shippers and the BDI have been going up helps a lot too.
I remember BS Detector also mentioning in a different article that SBLK had a much better debt to equity than EXM. As you mentioned, EXM is a lot larger, which may itself be a competitive advantage...but I have much to read again to formulate a cohesive thought.
On Jan 09 08:10 PM David White wrote:
> I should also point out that this merger occurred a fair way after
> the top of the shipping market. The vote on the merger by QMAR was
> actually in April 2008. It only completed recently. This was hardly
> at the top of the market. Plus most (possibly all as I did not check)
> of QMAR's fleet was more than a year or two old. That means those
> ships were on its books for much less than the 2007-2008 prices.
> To assert that EXM's book value is somehow skewed high by the QMAR
> purchase it basically a complete falsehood by OLE455. The company
> was bought at a premium to the stock price as most companies are.
> However, that would not have caused the book values of the ships
> to jump up. If anything they are likely substantially undervalued
> compared to their real value. Thus EXM's book value advantage is
> just that -- "an advantage".
John Lounsbury just wrote a great piece on the housing market, and how it would affect a recovery here:
seekingalpha.com/artic...
Given that China's economy is somewhat a derivative of the US economy:
seekingalpha.com/artic...
...it would follow that a quick recovery for China (i.e., this year or next year) would be difficult to forecast. In fact, Mr. Hugh is forecasting an outright recession due to factory closures, a very plausible scenario. I've always found a quick China recovery to be suspect, given its heavy reliance on exports to fuel growth. The infrastructure stimulus is just that - stimulus to prevent the economy from falling apart...not some anticipated boon to construction. My understanding is that past raw material purchases were targeted towards infrastructure that supported the export industry...that entire sector is now in danger.
Anyway, more reading.
On Jan 09 10:38 PM David White wrote:
> ramisle: If you were somehow talking about my belief that the 2014
> price of iron ore is likely to be substantially higher, you probably
> need to look at the charts since the start of the China mediated
> rise. It has gone consistently upward. The current huge move down
> is likely an aberration due mostly to the recession. The emerging
> growth economies will come back. The demand they will create will
> almost assuredly cause iron ore prices to rise further. This will
> mean ships will likely be substantially more expensive to build 5
> years from now. The only possible benefits I can see to the new ships
> may be possible fuel efficiencies. I am not completely sure how this
> will play out. However, I have not heard any great news about the
> latest ships being substantially more fuel efficient than their older
> counterparts.
China is dependent on exports for its huge growth. That does seem likely to slow down over time. However, it doesn't seem likely to stop immediately. Also as things become relatively more expensive to ship, China goods will become less competitive. At the moment we have not reached that point. Their technology and cheap labor are a hard combination to beat. Their shipping has been increasing by an average of about 7% per year. With the stimulus package, this may not even slow down this year. However, it does seem that it may be slowing down. That slack amy be taken up by India or possibly even a variety of smaller countries like Vietnam. It looks like there is still a lot of emerging growth to come.
As for the goodwill on EXM's books, I am guessing that much of that was associated with acquiring QMAR. I am further guessing that EXM did not want to reappraise (or by less than was done) the ships on QMAR's books (possibly for tax purposes). Paying for "goodwill" may have been a way to avoid doing this, while still acknowledging to QMAR that their ships were worth a lot more than their book value.
If you think SBLK is a better risk you should pay attention to the quick ratio statistics I cited (in the comments). SBLK's was .41, which was below even EXM's. EXM has a great excuse for being short of cash as part of the recent purchase of QMAR was done with $13/share of cash. You should also pay attention to the price to free cash flow statistic. EXM's is .85, while SBLK's is 1.33. This means that EXM is much more likely to quickly solve their immediate term cash flow problems. Since Zack's just yesterday reaffirmed $4+/share estimates for 2009 earnings for EXM, it seems likely that EXM should be in a much better quick ratio position by the end of 2009. It is unclear that SBLK will be. They are known to have poor debt management. Still in many ways it is a good company.
Also SBLK's capesize ships are definitely older, which may eventually be a problem. Since its smaller ships are virtually all newer, I am guessing that SBLK bought the capesize ships "used". This means their book value would not be as much of an understatement as might be the case if SBLK had bought them "new" at the dates of the ships. For lack of more specific information, I would tend to rely on the price to book ratios and the price to cash flow ratios. These indicate that EXM is the much better buy.
However, the overriding theme of this article was the charting. EXM (and many other shippers) are good longer term value plays at their current prices. However, the charting indicates that EXM should be about to make a sharp move upward. When the pennant completes, that should happen. Other shippers are already a good ways along in their current upmoves. EXM's chart taken in conjunction with the SEA chart makes it seem very likely that EXM is about ready to explode upward in the near term. As always this will be somewhat dependent on the overall market's behavior. However, the recent sharp rise in the BDI, which seems likely to continue for the reasons stated in the news section, should drive shipping up further in the immediate future. I believe the sharp move upward in EXM should occur soon. The pennant looks like it is completing now. Other shipping stocks have preceded EXM upward. They may instead be starting to soon encounter their resistance points.
In this case EXM would seem to be a laggard. However, EXM has become a major player in the shipping market after the merger with QMAR. It seems likely that this new EXM will likely soon become viewed as a leader. Both the Zacks note out Friday morning, and the article by Robert Maltbie that tagged EXM for a huge upmove in January, would tend to substantiate my beliefs. Still their are no guarnatees in the stock market.
Would it be smart just to get shares of all the above mentioned shipping companies ? Many analysts consider NM is the most well-managed company and has the most insider (23%) share-holders, why nobody talk about that ?
reports.platou.com
drybulkindex.com
trdewinds.no
steelguru.com
shipping.capitalink.co...
reports.platou.com
and the one that ole gave you brs-paris.com is from Barry Rogliano Salles will provide the orderbook info, the scrapping and insight to what's going on in drybulk.
I can't address what the PPS will do except that EXM and DRYS used to be the high fliers, because their spot exposure led to greater growth potential. DRYS is probably benefitting from speculation aboutthe spinoff of their rig division. EXM could do well, I'm worried about those 15 Panamax on spot and the 7 term charters that will expire this summer. All this hooplah about the BDI going up is all from Capesize. Panas haven't, at a time when coal should be moving. It's hard for me to get excited about this euphoric rise all the way to break even. The market doesn't seem to care about the fundamentals, so enjoy the ride, but watch out. Even with ship cancellations, the supply will easily keep up with demand increases, the BDI will level off at profitability but not growth. The only way to grow will be through consolidation, ship purchases, EXM and DRYS have debt, DSX has cash.
My only correlation between the price of ore and the cost of shipping is on a common sense, supply and demand basis. Iron ore is expected to drop by 40% because there is less demand, if there is less demand then there will be less shipping. 75% of small steel makers in China lost money in the second half of 2008, because of high cost of raw materials and shipping.
obviously, I have a bit of an obsession with shipping, mining, and steel, unfortunately I think I'll have to make money in another sector.
DSX has 6 capes with two more in 2010, They cancelled their large dividend in order to be in position to purchase ships that will be available cheap.
As a general rule spreading your money among different stocks (even shipping stocks) is a good idea. Then you don't get too burnt if something bad happens to one particular stock (or one particular sector).
One other point about shipping stocks is that they are generally paying great dividends at the moment (due to the relative lowe prices of the stocks). However, it is unclear how long this will last. Some may suspend dividends, etc. as ramisle cites above for DSX.
I am not too worried about the coal. The metallurgical coal has probably nearly stopped as the iron ore has. It should start picking up as the iron ore does. I also know they are building a lot of coal to diesel factories and coal for electricity power plants. Those should eventually use a fair amount of coal. Plus the electricity power plants should continue to use more coal. The coal companies have been doing great lately, so there likely isn't lots wrong with the coal industry. I really only can rationalize the metallurgical coal off hand. It does really make sense that the Chinese would hold off on metallurgical coal at the same time that they were holding off on iron ore.
I have also added the last 2008 Quarter and the 2009 revenue estimates from Yahoo Finance for the shippers I mentioned above.
Data below are from Yahoo Finance:
Name of Shipper Last 2008 Q Revenue Estimate Last 2008 Q Earnings Per Share Estimate Full Year 2009 Revenue Estimate
Full Year 2009 Earnings Per Share Estimate
DRYS $226.60M $1.29 $962.95M $5.56
EXM $134.53M $1.08 $531.62M $4.04
GNK $99.34M $1.56 $398.74M $5.29
DSX $81.91M $0.72 $242.60M $1.77
SB $52.42M $0.65 $230.03M $2.90
SBLK $59.55M $0.36 $199.98M $1.24
NM $210.36M $0.17 $713.75M $0.93
EGLE $57.32M $0.54 $21713M $1.66
Not surprisingly the two companies above with the biggest difference between revenue and earnings for 2009 were big percentage gainers at the end of last week. This would tend to indicate that the rises in both are correlating closely to the rise in the BDI, especially the capesize index.
I would also point out that the numbers for EXM are very good comparatively. Also DRYS, NM, EXM, and GNK do seem to be the revenue leaders. This likely also means that they will tend to benefit more from good news for the shipping industry, such as the BDI going up.
I still like the charting technicals for EXM best for the immediate term.
Last year, you could order a cape for $95 million for delivery in 2011, at the same time Capes were being purchased for $153 million, ONLY if they were ready for prompt delivery, and charter free. This allowed the owner to take advantage of the high spot rates, or a longer term charter at record rates. The value of the ship was directly tied to when it was to be delivered, because the whole industry agreed that charter rates would come down in 2010 because of newbuilds, it just happened earlier because of credit and recession.
Now which of those ship prices paid is the one you will use to determine book value.
The process is lengthy, a deposit is paid when the steel is ordered, and more deposits are made as the ship is built, ships slated to be delivered in 2009 will be delivered, and most ships slated to be delivered in 2010 will also. Some shipyards will go under, but most will survive. If owners cancel a ship under construction, they forfeit the deposits, and another owner, or miner, or large customer will be able to step in and have the ship finished for pennies on the dollar.
If the BDI goes up enough to be profitable, fewer ships will be scrapped, and fewer orders will be cancelled.
Those 12 VLOC's that Vale ordered hold the equivalent of 30 Capes.
Only 4% of dry bulk freight is done in North America, we are self sufficient in ore, coking coal, thermal coal, and cement and fertilizer. Our Infrastructure build will not help.
China is still growing at 8%. That may fall, but China is still likely to be growing at the end of the year. That means they will likely be using more of just about everything. Iron ore may be an exception this year and perhaps next. However, I would expect to see car sales begin to rise in 2010 as the recession should lessen then. Car sales gains should accelerate in 2011. We will likely see huge rises in iron ore prices then. Perhaps aluminum will become more popular for engines and other things??? BMW already uses a lot of aluminum in their car engines. When the growth starts again, demand for shipping will go up demostrably as many emerging economies that did not participate early shoudl be adding to shipping. The stimulus packages for the US and China probably amount to 5-10% of their respective GDP's. Since they are heavily infrastucture oriented, this should mean that there will be relatively little loss of shipping demand. Other countries have stimulus package also.
At least partially this article was meant to deal with the charting technicals of EXM especially and the shipping industry in general. Those technicals look excellent in the short term for EXM. There are no guarnatees, but EXM looks like it is set to rise quickly. Now also seems to be a good time to invest in shipping. The price to book ratios will likely determine the value of the stock over the long term. These look fairly solid for most of the shippers.
EXM is poised to shoot up shortly, if the the charts are predictive at all. The reverse head and shoulders of the SEA chart indicates the whole industry is likely to move up. The pennant formation on EXM indicates that EXM is likely to move up sharply in the near term. The fact that the 20-day SMA line is just crossing the 50-day SMA line for EXM (and is rising sharply) indicates that EXM should move quickly up in the near future. The fundamentals are good on EXM. There are some debt issues. I have tried to explain that some of those are due to the purchase of QMAR (part of the price of which was $13 cash per share). If it somes close to meeting its current earnings estimates, those earnings should put it in a much better fiscal position by this time next year. EXM still looks like a solid company. The chances are excellent that the stock price will jump in the near term as predicted by the charts (and the news as cited in the original article above). EXM is now clearly a leader. As such, it is a company that the big importer/exporter countries like China will chose to deal with heavily. Big companies tend to qualify their vendors. They tend to use only ones they have qualified. Naturally they tend to want to qualify the biggest ones first. EXM is a major player after its merger with QMAR. It should get a lot of China business. This should be good for the company longer term.
Also the Chinese know they will have to pay 2008 prices unless they get the retroactive concession. Otherwise they will have to settle more quickly. Therefore I am not looking for the process to be drawn out too much. The Chinese should settle relatively quickly. The miners should also settle. They don't want to bite the hand that feeds them (make the recession worse). I am looking for a big decline in iron ore prices. I don't think the miners will agree to a retroactive price cut unless the decision is made quickly (possibly not at all). It might set a dangerous precedent. I also do not think the miners really want to go to a spot price system. That will create a lot of headaches for them in the long run. A lot of this seems like negotiating ploys. This is a recession. I look for the miners and the Chinese to recognize that. They should agree more quickly than last year. The prices only last for a year after all. It is in the miners' interests to sell product in a recession year. It is in the Chinese interest to pay a cheaper price as soon as they can. They cannot afford to stop buying for any substantial amount of time without hurting their economy.
In a recession everyone gives in a little easier. They are also usually ready to take a little less than they had hoped for. There is little doubt the Chinese will still have to buy a lot of iron ore this year. Their stimulus package will not work well if they do not start importing it quickly. I'm sure they know that. There is only so much posturing they will want to do.
I have taken the PE numbers from TD Ameritrade for the above listed stocks. They do differ from Yahoo's. I think the FPE numbers should resemble each other more closely, so I have not bothered with those.
DRYS PE=.78
EXM PE=.94
GNK PE=2.18
DSX PE=5.37
SB PE=N/A
SBLK PE=2.16
NM PE=1.40
EGLE PE=5.23
EXM still looks like one of the best. Cramer has been touting DRYS though, so it may be a good market emotion play in the short term also.
Thanks so much. You are so knowledgeable and kind to answer
so many questions.
We really appreciate that.
I do have shares of many of those shipping companies. At least
8 of them. Just love them.
Keep on the good work.
The only really negative news for the market was the continuing Israeli vs Hamas conflict.
Perhaps we will start off the week well. The AA and INTC bad news was pre-released last week. Let's hope for the best.
After doing a bit of reading (still rather superficial) I came to a conclusion - I was so blinded by the wonders of a P/E under 1 that I didn't do much, if any, due diligence on EXM once I discovered it - it was too good AND true. The last time I found stocks even close were KEP in 2003, with a P/E around 4-6, and VLCCF, with a fat 28% dividend. KEP was much, much easier to understand than these shippers and much more conservatively financed, and was quite a success. I only wish I took VLCCF around that time, but I was more cautious then. Anyway, enough digression.
After going through the numbers of various shippers, looks like DSX, like OLE455 said, is by far the safest bet due to lack of leverage amongst the larger shippers. I also got interested at ESEA - it is even more conservatively capitalized than DSX with a very healthy current ratio, but it lacks the larger ships that would be involved in this China play. Both still did very well the past couple of years due to high BDI rates, and paid great yields at higher stock prices.
Since I do not profess (at all) to know that much about this industry, seems the safest is the soundest for me. I'm not too sure I will sell my EXM position (I only took a nibble), but my next investments in this industry will certainly be more towards DSX and ESEA. I understand OLE455's point of view that P/E and book are dubious in this kind of environment, and given the leverage and cash positions of the majority of these shippers, I'd tend to agree.
Anyway, I do hope your analysis on EXM is on the mark. I have other China plays going on, and would like to see more of them come to fruition. Maybe part of your analysis can involve bauxite shipments, given that China's now the largest producer and consumer of aluminum (12 mil tons) in the world - China is already dictating prices, downward unfortunately for now (disc: long ACH).
It is hard to go wrong when most of these stocks are minimum 70% off their highs - AS LONG AS YOU ARE CAREFUL. Thanks again.
Ricard: Keep in mind that the two guys who were arguing with me about EXM were shorting shipping stocks not just EXM. They would have found negative things to say about any of the shipping stocks.
Market capitalization $367.16M
Divided by
Shareholder Equity: $1,358.75M less Goodwill: $321.4M
Haven't run this again for anybody else.
Note, P/B uses the company's valuation of its boats, which means that there's significant fudging possible, and that comparing these numbers across companies without expertise in the accuracy of their asset valuations is problematic at best.
Credit is starting to thaw, goods are being shipped, the BDI is moving up from the bottom, and the dry bulk shippers have bounced nicely off of ridiculously low bottoms. With China and the USA pouring trillions into infrastructure, the trend should be upward for this group.
On Jan 09 11:09 AM BS Detector wrote:
> OLE455 wrote: "Current rates are below break even for ship owners
> and, due to massive newbuildings coming this year, are not expected
> to rise significantly."
>
> Then why would shipbuilding continue? Where is the economic incentive
> to enter the market?
>
> SBLK reported that ship scrappings were higher in just the month
> of October than they were over the previous two years. DRYS walked
> away from deals to buy more ships. NM canceled contracts for new
> ships. They are not alone; you're not the only one who sees that
> dry bulk is not what it appeared to be a year ago.
>
> That said, I agree that book value is overstated (not meaningless),
> earnings projections are a bit rosy, and that most of these companies
> are very leveraged. But they also have multi-year contracts for
> many of their ships generating good cash flow, and as long as their
> covenants aren't tied to closely to the values a very thin, distressed
> market sets for their ships, they may get by just fine.
>
> Some of them will. Some of them won't. Better do your own research.
I did the calculation myself using the Q3 2008 data, I got a figure of .26 for EXM which is close to your second calculation. That is probably approx. accurate.
I also found from looking at the Q3 report that the 7 capesize ships on order for EXM for 2010 are all joint ventures. EXM is only on the hook for about 50% of the costs. This makes me feel less worried about EXM's fiscal well being. Perhaps it will have the same effect on you.
The BDI was up again today, especially the Capesize index. But commodities were down dramatically, as was the market. The shippers behaved in a similar manner. However, the charting technicals are still in place for EXM. In fact EXM needed to come down a little to get to the end of the pennant formation. I am hoping that there is not a complete market meltdown in the offing. I am hoping EXM gets a chance to rise sharply as the charts seem to be indicating it will.
The SPY is up about $.48 after hours. I am cautiously optimistic about tomorrow.
The shipping business with the Chinese does seem to be heating up. The Capesize index went up another 6+% today. At this rate, it should be up to a reasonable level soon.
Bought many shares of NM, and EXM when they were beaten down yesterday. Feel good about it and Never have so much confidence
in shipping business. Good luck .
1. They won't be driving the boat again for a long time (har har).
2. The analysts I know that were all long the shippers before the deleveraging are very concerned now about the leverage (that's a shock, eh?)
3. There's still a lot of capacity slated to come on-line.
4. DRYS is run by a questionable, self-dealing type. Witness the massive dilution shareholders had to withstand recently. It's almost a certainty that DRYS will never make it back near its highs in the next 5-10 years.
5. Using the wrong metrics to debate the fundamental merit of a stock or group isn't really the best way to go about things. As pointed out already, NAV is the way to value shippers. Not P/E, not PEG, certainly not FPE. If you're letting the sell-siders do your work for you, you may as well use a dartboard.
" In fact, one common issue I've noticed quite a lot has to do with institutional ownership of a stock in excess of 100% .. "
The NAV argument has been discussed earlier in this comment section. Even its proponents think it is an extremely flawed approach at the moment. The disparity between the GNK term lease price and the BDI capesize index spot price should tell you that. Even looking at the chart of the price of the 5 year old capesize prices should tell you that they are likely an illusion. The recent price high was about $150M for a capesize. The recent price low was less than $50M. This is clearly a temprorary thing. It is as much an illusion as the current BDI. Therefore NAV doesn't work in a realistic way at this moment. As the recession ends the price is likely to be over $100M again. Iron ore prices (steel prices) will pop back up as demand does. This will be reflected in new ship prices and in used ship prices.
The BDI is up again today, especially the capesize. We are clearly going in the right direction quickly.
You don't need the hedge funds to make a reasonably good trade here. The shipping stocks are paying great dividends now. I think EXM's was about 20% last I remember. That is not likely to continue too long. However, the dividends should still be good. The value in the shippers is there.
Assuming that someone that disagrees with you is short dry bulk stocks, is a typical message board response when you can't argue the facts. And I have good things to say about NM and DSX.
The facts are that DSX has owned those 6 Capes for a long time and they are all on very good charters, they will be saving $70 m by not giving a dividend next quarter, which will allow them to buy more ships like the 11 year old Cape that just sold for $37m.
You keep insisting that EXM has some advantage by having a large fleet, Cosco in China controls 417 bulk ships, Mitsui in Japan has over 200 and more on the way.
Yahoo, Zacks, and TD Ameritrade do not have shipping analysts, they report the earnings estimates given by shipping analysts like,
Urs Dur, Lazard
Doug Mavrinac, Jefferies
Natasha Boyden, Cantor Fitzgerald
Omar Nokta, Scott Burk, etc.. Read them, they aren't recommending companies with high debt and high spot exposure. They don't see
The SPY is below its recent trading range of $88 to $92. It looks like it is climbing back up into that range today. It got a little nudge down farther than it might have gone yesterday by Fed Governor Krozner's resignation. It should have great upside for the rest of this week. This should be good for shipping.
In this vein, another one I like is DRYS. I agree with the comment above that the eventual spinoff of their deep sea drillers will be a tremendous financial boon to them. This should make this company a little more appealing even to you. It too has big debts.
That does not mean I necessarily disagree with my comments on the BDI. I am still expecting it to rise quickly to levels more commensurate with that charter day rate. The amount of material that China will have to import for its stimulus package should more than make up for the losses due to the recession. Thus I feel the prices have to go up. The demand is there, even if it is somewhat artificially induced.
Therefore I find EXM's book value of $30+/share to be more appealing than DSX's book value of $10+/share. Certainly there is more risk with EXM, but there is more reward also.
Feb, 05 bought Cape Pantelis $ 63.5 m
Dec, 06 bought Cape Sideris $ 91 m
Sold Pantelis 2/07 for 81 m
April, 07 bought Cape Aliki $ 110 m
June, 07 bought Cape Simirio $ 98 m
Nov, 07 bought Cape Boston $110 m
Dec, 07 bought Cape Salt Lake City $140 m
Feb, 08 bought Cape Norfolk $135 m
9/06 ordered two newbuild capes for dely 2010 for $ 60 m each
During this time Diana had four secondary offerings and raised $600 m
for the purchase of these and other ships.
I don't recommend buying DSX, I think it is healthy and in good position to buy more ships cheap.
I think all bulkers will have earnings shortfalls, the analysts have not upgraded forecasts since the fall of rates.
Navios could be the exception, todays rates are not much lower than the rates they have had for years= less disappointment.
DRYS is a soap opera,
I love dry bulk. If you like the stock too much you end up holding it from $81, all the way to $4.
I don't mind risk, the stock price doesn't care what I like, it reacts to what the market likes. The talking heads are telling everyone to avoid companies with debt, to go for stocks with a great balance sheet, all this crap that I learned about dry bulk doesn't matter once Cramer starts talking about it.
Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October
"They have already hit zero," said Charles de Trenck, a broker at Transport Trackers in Hong Kong. "We have seen trade activity fall off a cliff. Asia-Europe is an unmitigated disaster."
Shipping journal Lloyd's List said brokers in Singapore are now waiving fees for containers travelling from South China, charging only for the minimal "bunker" costs. Container fees from North Asia have dropped $200, taking them below operating cost.
Industry sources said they have never seen rates fall so low. "This is a whole new ball game," said one trader.
The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.
Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.
Korea's exports fell 30pc in January compared to a year earlier. Exports have slumped 42pc in Taiwan and 27pc in Japan, according to the most recent monthly data. Even China has now started to see an outright contraction in shipments, led by steel, electronics and textiles.
A report by ING yesterday said shipping activity at US ports has suddenly dived. Outbound traffic from Long Beach and Los Angeles, America's two top ports, has fallen by 18pc year-on-year, a far more serious decline than anything seen in recent recessions.
"This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.
Idle ships are now stretched in rows outside Singapore's harbour, creating an eerie silhouette like a vast naval fleet at anchor. Shipping experts note the number of vessels moving around seem unusually high in the water, indicating low cargoes.
It became difficult for the shippers to obtain routine letters of credit at the height of financial crisis over the autumn, causing goods to pile up at ports even though there was a willing buyer at the other end. Analysts say this problem has been resolved, but the shipping industry has since been swamped by the global trade contraction.
The World Bank caused shockwaves with a warning last month that global trade may decline this year for the first time since the Second World War. This appears increasingly certain with each new batch of data.
Mr de Trenck predicts Asian trade to the US will fall 7pc this year. To Europe he estimates a drop of 9pc – possibly 12pc. Trade flows grow 8pc in an average year.
He said it was "illogical" for shippers to offer zero rates, but they do whatever they can to survive in a highly cyclical market.
Offering slots for free is akin to an airline giving away spare seats for nothing in the hope of making something from meals and fees.
Base on your info, it means now is the best time to buy shares
of shipping companies since WW2.
But them and hold them for a year or two.
Things have to turn around. Not the end of the world.
The credit problems will no doubt slow down the building of new ships. Sans credit, agreat deal of cargo could not be moved which created a backlog of business. Rates show move up as the credit thaws.
The manufacturing sector of China has been killed. The Chinese have always been "conveniently capitalist" when it suited them, but I suspect with so many people out of work they will return to their communist roots. People will expect the government to create jobs, provide food, and energy ---- and the government will do just that to prevent a revolution. I would expect that the 600B is just the beginning of the subsidy package in China. Ships ahoy!
My only concern this week is that the ship companies seem to follow the wider market which seems to be following oil and gas inventory reports and seems to be hiper worried about banks again, and the pending quarterly reports and jobs reports. I was encouraged by the IBM quarterly report which seemed to say that the world is not coming to an end after all. I wrote IBM off as a GE like, bloated over sized no where left to grow company years ago, especially when they sold their laptop company to China.
I am long on EXM, PRGN and SB and sold off DRYS. I won't be buying DRYS again at any price.
ROTFL @ fate