The container shipping business has gone through an unprecedented boom and bust cycle in the last decade, to the point that many companies that were once titans of cash flow have gone bankrupt or are now facing the heavy pressure burdensome debt loads deemed necessary in a time when growth was endless. This is similar to the oil tanker industry, where giants such as Teekay Tankers (TNK) and Frontline (FRO) now have very negative EPS and prices have collapsed 95% from boom peaks.
As is normally the case, in times of crisis, only the strong survive, and due to the cyclical nature of this industry, when the next boom comes, those that do survive will thrive. I believe that Box Ships Inc. (NYSE:TEU) offers an attractive long-term investment, with a solid book value at the core and attractive pricing ratios to income, current and future. First some info on the company.
Box Ships is an international shipping company, a micro cap, whose specialty is in the area of container transportation. These containers are generally truck sized, and the profitability of Box Ships depends heavily on container ship charter rates. Unlike most industries, container shipping is a true example of free market economics, and supply and demand heavily dictate profitability and rates. Over the course of the global boom during the 2003-2008 time frame, the shipping industry expanded rapidly, fueled by artificially credit inflated demand and rising willingness-to-pay for shipping, as rates hit their peak in 2006 and retested highs in 2008 before ultimately collapsing in the last four years to lows. Through all of this, Box Ships has been hit hard, and has had major hits to income with the rest of the industry, however, I believe that the company at this price point offers a significant opportunity to the right investor, the distressed asset investor, known colloquially as the bottom feeder.
Show Me the Value
Box Ships trades at a significant discount. Right now the price point per share is about one third of book value.
Most of this book value is tied up in the form of long-term assets and the ships, against which the company has debt and financing, though the firm does have approximately $1.5/share in cash and equivalents. In any case, the book value here offers a firm support in the event of a bankruptcy or some other form of disaster scenario. However, I believe that the company has a significant opportunity to sustain through the global continuous recession, as despite the economic slowdown in Europe and around the globe, Box Ships has maintained consistent profitability over the last several quarters, and while their EPS is down year over year, this has more to do with share dilution than revenue weaknesses. At this price, you are looking at an exceptional earnings multiple with high upside potential. In addition, the commitment to a dividend adds value to the stock. When the income is there, Box Ships has repeatedly reaffirmed its commitment to returning dividends to shareholders. To wrap things up, at this price the value investor comes into play, and I think the base case is compelling.
Strength and Order in Chaos
Box Ships has decided it's prudent to take advantage of the current mess in the shipping industry by using beneficial financing methods to furnish acquisitions, as the company issued preferred shares as recent as last week for this purpose. While some, if not most, would consider this a risky bet and perhaps dangerous given the weakness in the industry at the moment, I would argue that it is a strategic, if not bold, move that management has decided to take. As the weak companies fail, the strong will pick up capacity at good price points.
The Turnaround Play
What I have conveyed throughout this article is a compelling long-term play on distressed value wrought by years of excess supply and stagnant demand. However, while the current market price offers decent base case value, the far more interesting scenario emerges when one considers potential for a rebound. As shippers rebound, there will be fewer survivors to reap the benefits, and with the acquisitions it is making in the thick of the mess, I believe that Box Ships stands well positioned going forward in a recovery environment.
How to Tackle?
So now that you understand the investment hypothesis, the value play against downside and bankruptcy, and the potential for upside income as well as the high level of commitment by management to return value to shareholders via dividends, the question becomes that of how to proceed. Do you want income now as a hedge against potential downside? One way to accomplish this would be to write covered calls, looking at the 6-month window, the rate right now for calls expiring in January of 2014 is around 15 cents at a strike price of $5. This offers 5% in current income as a hedge, and leaves you with 25% upside, 50% annualized, if it crosses the $5 mark between now and January. In the more likely scenario, it offers you 10% in annualized income right now on your investment as a hedge.
I would caution against selling puts at this price point simply because I see more upside in simply owning the stock. In any case, there is certainly value behind the ticker in a disaster scenario, exceptional profit in the upside scenario, and decent EPS in the interim. This is an investment for those looking for a high return micro cap backed by assets to hedge against risk. I expect that for the right buy-and-hold investor, myself included, Box Ships Inc. presents a rewarding opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.