The shipping industry has experienced numerous headwinds since the crisis of 2008. A massive influx of newbuilds, collapsing charter rates and rising fuel costs have and will continue to present significant obstacles for carriers in the future. Despite the systemic challenges facing the industry, nothing can change the fact that an overwhelming majority of the world's commerce travels by water.
When measured against the global maritime transportation sector, American shippers that maintain a large amount of Jones Act vessels enjoy a better position than their international counterparts.
What is the Jones Act?
Tracing its origins to federal legislation known as the Merchant Marine Act of 1920, Jones Act ships are American flag, American built and crewed by American sailors. These vessels are the only ships allowed by law to transport goods between ports within the United States and its territories, in addition to the cargo of its government agencies - including armed forces.
For investors this means that shipping companies whose fleets comprise a large proportion of American flag ships are able to enjoy the benefits of a somewhat protected market. I have found two companies which are particularly appealing and I believe merit more in depth investigation.
The One at a Premium: Matson, Inc. (MATX)
A recent spin-off from Alexander & Baldwin (ALEX), the Matson shipping company is a venerable business with a history dating back to the late 19th century, during the initial development of Hawaii. The company's business is concentrated around the Pacific, with the bulk of its efforts focused on serving routes between Hawaii, Guam, Micronesia, Alaska and the mainland of the United States.
Matson has presence in Hawaii for over a century and with the significant troubles encountered by its regional competitor Horizon Lines (HRZL.OB), it has moved to increase its market share in Micronesia and Guam. Currently priced at $25.24, and offering a current dividend yield of 2.38% against $6.57 of book and $.47 of cash, Matson shares trade for a healthy premium relative to the share prices of other shipping companies - particularly those outside of the United States.
Though I believe that it is justified to pay a premium for Matson, for reasons which I will discuss later, I also believe that patience and discretion should be employed before an investor makes a commitment. I would be gladly purchasing shares in Matson when its dividend yield heads north of 3% though relative to the significant yields offered by other shippers such as Costamare (CMRE) and Navios Maritime Partners (NMM), for example, Matson's yield does not appear remarkable, though it is justifiable.
I would argue that this low yield is justified for the following reasons:
1. The manifold advantages enjoyed by Matson under the Jones Act - the core of Matson's business is concentrated in serving American territories separated from the mainland. By virtue of this, an overwhelming amount of commerce has no choice but to travel by sea, on American flag ships, creating an extremely stable source of revenue that is unlikely to diminish or be extirpated by new developments on the horizon. With the financial difficulties of Horizon Lines, Matson was able to further increase its market share. According to the company's most recent 10-K filing, which can be found here, approximately 65% of the company's revenue was generated through Jones Act related business. For a fixed income investor, exploration of the company's corporate debt could be interesting given the margin of safety afforded by the Jones Act legislation in regards to interest coverage of the enterprise.
2. Pricing power - Matson is able to pass the increase in cost of fuel and freight handling, two expenses that have a significant impact on margins of many carriers, onto customers through surcharges and therefore is better situated to absorb volatility in fuel costs and labor costs.
3. Extremely high quality of labor - Of all the American flag shippers, Matson has consistently been regarded as one of the best companies to work for among members of shipping unions. As a result, highly qualified sailors are eager to work for the company and consequently Matson is able to reduce unexpected and extremely costly delays in its terminals and on its vessels because of its access to some of the most experienced mariners in the world.
I believe that Matson is a quality company, providing an essential service that is stable and perpetually required. Exceptional characteristics notwithstanding, I would wait for a broader market selloff before purchasing shares in order to capture a higher yield or utilize dollar cost averaging.
The One at a Discount: International Shipholding Corporation (ISH)
I believe that ISH represents a substantial value opportunity to a careful and patient investor. Headquartered in Mobile, Alabama, ISH also enjoys the protection of the Jones Act for some of its fleet. In addition, the company also has a portion of its fleet deployed in international markets. I like ISH because of its diverse mix of assets, and its recent acquisition of more American Flag assets through the purchase of United Ocean Services. The company also has several specialty operations, including rail-car transport and a molten sulphur carrier on long-term contracts.
ISH is a small company, with a market capitalization of $141M and a current dividend yield a little over 5% with a dividend payout ratio of .37. Despite this robust yield, the company has cut its dividend to common shares in the past and investment in common shares does contain the risk of further dividend cuts if the shipping market deteriorates. ISH also placed an offering of 25M in preferred securities yielding 9.5%. I believe that the preferred securities could represent a good investment, especially given the stable revenue stream of American flag assets, the company's specialty lines of business and the company's focus on medium to long-term charter contracts.
ISH is currently priced at $19.7 per share against a book value of $36.41 and $2.76 of cash per share. In other words, it's trading at a substantial discount. From a purely quantitative perspective, this presents, at least on the surface, an extremely attractive opportunity to a value oriented investor - however caution must be exercised - especially when it comes to evaluating the fair value of many of the fleet assets owing to the serious devaluation of ships on the international market since the 2008 economic crisis and the large influx of newbuilds.
At current prices, I am unaware if a clear margin of safety exists, however, I believe that ISH is extremely attractive at prices closer to $16.50 per share on the common (slightly under 50% of BV divided by two plus cash and cash equivalents). I am very interested in ISH preferred stock, which at 9.5% could provide a welcome source of yield for an income oriented investor, I also wish that it was convertible.