Why I Like TBS International

TBS International

As the economy rebounds, returns the highly cyclical shipping industry will lag durable goods orders and manufacturing indicators. While I will save the “have we reached the bottom?” discussion for other analysts, dry bulk shipping stock will rebound significantly with the economy.

As an individual investor I look for values in low market cap, low volume stocks. TBS International (TBSI) has a market cap of $220.9 million as of April 1, 2009.

Overview

TBS International offers five lines of comprehensive business: Ocean Transportation, Logistics, Port Services, Operations, and Strategic Planning. The company utilizes these different lines to offer a relationship over straight shipping. They maintain a diverse fleet of vessels to serve virtually any industry and can access shallower ports than other large container ships.

TBSI has been beat down with the rest of the economy due to declining revenues both due to shipping rates and volumes. TBSI has suspended a significant number of vessel purchases, cancelled $15 million in corporate bonuses, and frozen salaries for officers and office staff.

To make this company more appealing, insiders own a significant majority of the company (55.3% according to the Motley Fool), a key to look for when investing in small cap companies.

Further Depression

TBSI delayed its earnings announcement for 2008 because it was negotiating waivers on certain financial covenants with lenders. During the 2008 earnings call one private investor admitted to selling half of his stake in the company due to the waiver negotiations. In the 10K filing the company states that its internal models forecast that it will not meet covenants in 2010. This kind of headline can spook the individual investor but an examination of the 10K reveals:

“During March 2009, based on third-party vessel valuations, we did not meet collateral coverage requirements. The credit facilities were modified to waive the collateral coverage and all financial covenants through the fourth quarter 2009.”

The reason the company delayed earnings was to address the “going-concern” validation which was dependent on the ability to gain these waivers. TBSI remained well in compliance of its leverage and interest coverage ratios as of 12/31/2008 but as previously mentioned, anticipated violating the covenants in the future resulting in a going concern question. This was both due to falling EBITDA and tightening of covenants (for example the interest coverage ratio steps from 1.1x to 1.75x during the last 3 quarters of 2009). Banks are likely to negotiate waivers because they are aware that these covenants ramp up quickly and the other option is bankruptcy proceedings. You can see the covenants and current levels in the company’s 10K illustrating management’s transparency.

Why I like TBSI

TBSI has plenty of cash to weather the economic downturn and keep banks happy, a current ratio above 2.0 and a declining debt balance. TBSI traded above $60 during June of 2008 but has declined to the $6-10 despite an improved balance sheet and $226MM in operating cash flow.

Covenant waivers across the industry have greatly reduced the outlook for TBSI and its peers. According to Forbes.com, competitors DryShips (DRYS) and Excel Maritime Carriers (EXM) have not yet been able to negotiate waivers on covenants. TBSI’s ability to do so ahead of the competition indicates both a good relationship with its bank group and signals a vote of confidence from those banks.

TBSI has taken the correct steps to conserve cash. Fellow bulk dry shippers DRYS and EXM, who currently yield dividends of 16.2% and 36.0% respectively, may find it necessary to cut dividends to preserve cash. TBSI does not currently pay out a dividend leaving it less subject to shareholder backlash.

I would add that this is a mid to long term pick due to the possibility that things will get worse before they get better. Furthermore, the low volume on this stock can result in a large bid-ask spread.

Disclosure: Author is long TBSI and has no position in DRYS or EXM.

Comments

[kenboy:]

Didn't EXM announce two days ago that they HAD successfully gotten covenant waivers? Too lazy to do a quick search?
www.excelmaritime.com/...

Apr 03 09:09 AM

[User 328050:]

note, tbsi has a lot of insider buying of stock of the company as of12/09/08

mike mc guire

Apr 03 09:30 AM

[Greg Schuetz:]

Fair enough, thanks for the comment, I should have done another check.

However, so as not to mislead readers, the EXM ammendment differed substantially from TBSI covenant waivers. EXM was diluted in the process through direct equity infusions and warrants. This would reduce (atleast short term) exposure for the bank group making them more willing to waive covenants.

Apr 03 09:45 AM

[brombonz:]

"Fellow bulk dry shippers DRYS and EXM, who currently yield dividends of 16.2% and 36.0% respectively:"


"PRESS RELEASE
Excel Maritime Provides Charter Status Update and Announces Suspension of Dividend
Last update: 8:31 a.m. EST Feb. 17, 2009"



"DryShips Announces Significant Reductions in Its Capital Expenditures and Suspension
of the Dividend Effective for the Fourth Quarter 2008
Company Also Announces Preliminary Fourth Quarter 2008 Results
ATHENS, GREECE--(Marketwire - January 22, 2009) "

Apr 03 10:05 AM

[Dave Marsh:]

TBSI is a great company and you make some good points. Factual correction though: EXM and DRYS both suspended their dividends quite some time ago. And your sentence about "...can access shallower ports than other large container ships" points out a gross misunderstanding that Cramer doesn't get either - Shipping is divided into three main sectors: Tankers, Dry Bulk, and Container. They are like apples and oranges. TBSI operates solely in the dry bulk arena, and exclusively with Handysize and "Tweendeckers", which are smaller than the other classes. You should have just said "...than other larger classes of dry bulk ships". On the bright side, TBSI is often overlooked by investors. All you hear about is DRYS, EXM, DSX and GNK, most of the time. So thanks for giving this great company fair mention; just check your facts a little better. I'm long TBSI, DSX and GNK.

Apr 03 10:18 AM

[Oraclepkwy:]

Greg:

You are way outdated on the DRYS and EXM dividends. They were cut ages ago. Just a friendly comment - not checking comparative stocks unfortunately undermines your whole article (which, aside from the dividend comparison) was a good one.

Apr 03 01:47 PM

[poor&unempl...:]

Greg either you are getting paid by TBS or you are a @#$%%. I would suggest you do little research on TBS and it's management going back to late 80's - early 90's and let me know what you find.

Also, learn little bit about shipping business and let me know the market value of the vessels purchased by TBS about 6 months ago.

Did I hear it right - $38 million dollar 20 year old junks are worth may be 2-3 million now?

How much money they owe to the banks??

Apr 06 07:21 PM

[PeteK:]

We all know that in normal world economy, all these shipping companies are Kings & Queens of the Seven Seas.
Most of these companies were very good and friendly to their share-holders in the past. They are fighting for survival right now and we should have patience to wait too.

Apr 10 10:54 PM

[ramisle:]

Debt has no patience.
In order to satisfy loan covenants, some of these companies have sold huge amounts of stock at lousy prices. Or, they cancelled purchases of ships, and paid a penalty.
Luckily TBSI and DSX held secondary offerings at or near the peak of the Dry bulk boom. And used that money to retire some debt.
Yes, shipping will come back. but this time it's different. There will be an oversupply of ships for a few years. No more perfect storm. of overheated economy, and shortage of ships.
You need to pick the right shipper.
Electronics Retailers were once Kings and Queens of the Consumer World.
Which one did you want to own? Circuit City, or Best Buy.

Apr 11 12:09 PM

[PeteK:]

ramisle;
Agree with you in many ways.
The difference is that to start a shop like Circuit City or Best Buy, or
even a supermarket takes no effort and it can be done in days.
To start a Shipping Fleet takes lots more money and effort and connections. It involves both political and international skills to run a fleet of ships. And the most important, a crew of professionals to sail the ship. Experience counts, and loyalty to share-holders also important, and know how to deal with international clients counts number ONE. Greek sailors are the best in the world.

Apr 12 03:30 PM

[poor&unempl...:]

I hope you are still buying GM stock for the same reason. Developers in Miami are also fighting for their survival. How about some condos in Miami? Buy and hold for next 50 years and your grandchildren will have a place for winter vacation. You will save the economy too!



On Apr 10 10:54 PM PeteK wrote:

> We all know that in normal world economy, all these shipping companies
> are Kings & Queens of the Seven Seas.
> Most of these companies were very good and friendly to their share-holders
> in the past. They are fighting for survival right now and we should
> have patience to wait too.

Apr 14 12:07 PM

[ramisle:]

My only purpose in referring to CC and Best Buy, is that one did things well, and the other went bankrupt. In shipping, you have companies like DSX which sold shares at high prices and are not having debt problems, or a company like EXM or DRYS, who have had to sell shares at horrible prices and are now very diluted, and still have debt problems. You still have to pick the right companies.
You are referring to Barriers of Entry into the shipping business. That might help keep the competition low on the amount of Shipping Companies, but it won't help the problem of having too many ships for fewer cargos. You can talk about scrapping of older vessels, or ship cancellations, but you won't find anyone in the business who isn't calling for an increase of 10% in tonnage on the water this year and next. I doubt that you will find anyone who sees a 10% growth in demand. Look at worldwide Steel projections.
Greek sailors? The biggest companies in Bulk are Chinese, Korean and Japanese. The NYSE listed companies are Greek owners, incorporated somewhere tax friendly, managed by someone else, with a crew from the Philippines.

Apr 14 05:00 PM

[PeteK:]

poor,
I still own some GM stocks, and plan to pass to the next generation if GM survives. Starting from my grandparents on down, we drive mainly GM vehicles. Pontiac, Buick, Chevy G20, Impala, S-10,
you name it, we own or owned them before. My granfather told us to buy "Make in USA" always. Too bad nowadays not much more are made in the USA. Kind of sad but true. I was mad at the UAW who destroyed GM. I blame them for the destruction of a great American industry. They asked for too much and never stop. that's the American problem these days. Same thing is happening with Boeing. Never learn. Another sad thing. All these need change, like President Obama said many many times, Change is what is needed for this great country. Hope you agree.

Apr 22 04:46 AM