Matson's 2 Sources Of Competitive Advantage

Dec.23.13 | About: Matson, Inc. (MATX)

In this article earlier in September, I stated that Matson, Inc.'s (NYSE:MATX) molasses spill into Honolulu Harbor would ultimately hurt their earnings and ultimately their share price. I was right. What I had failed to point out, though, is that Matson, Inc. can rebound from the spill and save their profit margin, and I'm going to tell you how. Here I want to briefly highlight the two competitive advantages that Matson, Inc. has going for it- the Jones Act, and its ability to raise rates at will.

The Jones Act- or the Merchant Marine Act of 1920- was enacted as a federal statute that promotes and maintains the American merchant marines. The law regulates maritime commerce in U.S. waters and between U.S. ports. The law has several provisions in there, but the one I specifically want to speak to is the cabotage provision which restricts transporting goods or passengers between U.S. ports to U.S.-built and flagged ships. In layman terms, the Jones Act prohibits any foreign built or foreign flagged vessel from engaging in coastwide trade within the U.S. because ships that transport cargo or passengers between two U.S. ports must be U.S. flagged, crewed, owned, and built. Foreign shippers cannot compete under these rules. Under the Jones Act, Hawaii can receive cargo from foreign shipping companies directly from Asian ports, however, if that Asian exporter has cargo for Hawaii and the mainland U.S., the shipper cannot stop in Hawaii and must go directly to the mainland U.S., and the mainland U.S. will ship the cargo to Hawaii. Currently three mainland shippers take cargo from the mainland U.S. to Hawaii- Matson, Horizon Lines, and Pasha Hawaii Transport Services.

What does the Jones Act really do for Matson, Inc.? It eliminates almost all foreign competition. What does the Jones Act do for the people of Hawaii? It increases the price of consumer goods.

Secondly, Matson, Inc. has the ability to raise fees at will. In Hawaii, Matson, Inc. draws a lot of attention at how frequently they raise rates. On November 25, Matson, Inc. announced that it would raise rates for Hawaii service by $175 per westbound container and $85 per eastbound container, effective January 5, 2014. Estimates of the increases result in shipping costs rising on average 5.5%. Increases are also being imposed to service to Guam, the Commonwealth of the Northern Mariana Islands and the Federated States of Micronesia by $275 per container. Without getting into historical price increases, price increases is the norm for Matson, Inc.

The impact on the residents of Hawaii is shocking. As of December 20, the national average of regular gasoline is at $3.22 per gallon, while Hawaii's average of regular gasoline is at $3.91 per gallon. This is just gasoline- imagine what other price gaps could come up! The point here is that the cost of living in Hawaii is already high enough, and Matson Inc.'s competitive advantages allow them to succeed at the cost of Hawaii's cost of living.

From a business point of view, I have to say that Matson, Inc. can thrive in good times and in bad because of these advantages. It wasn't my intent to argue the merits or otherwise of the Jones Act or Matson, Inc.'s strategy to raise prices, just to identify these two sources of an advantage.

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.