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Summary

  • Seaspan has a beta of approximately 1.0, indicating average systematic risk, but does this fully reflect its risk and volatility? Three aspects are worth noting.
  • The P/E ratio is lower than at other times in the stock's recent history. Does this indicate an opportunity or is it cause for concern?
  • The company's balance sheet has seen a marked increase in the current portion of long-term debt.
  • Additionally, SSW's earnings results are greatly influenced by changes in the fair value of financial instruments.

Seaspan (NYSE:SSW) is an independent charter owner and manager of containerships, which the company charters primarily to major container line companies. SSW is incorporated in the Marshall Islands and its principal executive offices are in Hong Kong. The company currently operates 71 vessels and has entered into a contract to acquire 16 more with delivery dates through May 2016. SSW's most recent annual report for the year ending December 31st, 2013 shows that the company's primary objective is to grow by way of vessel acquisitions.

(click to enlarge)

One of the aspects of Seaspan's risk-return profile that attracted my attention is that it has a beta of close to 1.0, yet a dividend yield of 6.2%. (Beta is a measure of systematic risk. A beta above 1.0 indicates above average systematic risk, while a beta below 1.0 indicates below average systematic risk.) From this information alone, it appears that an investor can earn an above-market dividend yield at average risk. It is important to investigate a bit deeper though before jumping to this conclusion and I will first examine the beta figure.

There are several different ways to calculate beta and we can look at three to see if there are any major differences. If 5 years of monthly returns are analyzed, beta equals 1.22 and adjusted beta equals 1.15. (The adjustment method used involves multiplying the beta by 2/3 and then adding 1/3. The aim of this adjustment to historical beta is to generate a more accurate prediction of future beta.) If 5 years of weekly returns are analyzed, beta equals 1.25 and adjusted beta equals 1.17. If 2 years of weekly returns are analyzed, beta equals 1.10 and adjusted beta equals 1.07.

Thus, the beta is close to 1.0 in all three of the above cases. (To be even more technical, a hypothesis test finds that none of the above three unadjusted beta results are significantly different from 1.0.)

Digging a bit further into fundamentals, Seaspan's P/E is currently lower in comparison to at other times in SSW's history. This could suggest a value investment opportunity, or it could suggest that something is amiss. This chart gives a glimpse of the historical deviations in P/E.

P/E

Diluted EPS for Year

7.59

2013

Price taken as of 4/22 or 4/23 of the year following the EPS year

25.02

2012

NA

2011

NA

2010

6.91

2009

NA = meaningful P/E could not be calculated since EPS was negative

NA

2008

NA

2007

29.71

2006

As can be seen, the P/E ratio has not always been as low as it is now. Our attention is also drawn to how the P/E cannot be meaningfully ascertained during certain years because of negative EPS. This highlights the point emphasized in the graph below, which is that net income (and by extension EPS) has fluctuated a great deal.

(click to enlarge)

This graph reveals little consistent relationship between net income and revenue; revenue increased steadily over the course of this time period, yet net income swung into negative territory on several occasions.

To see what drives net income, it is useful to observe the interplay between operating earnings and a line item on the income statement that appears to hold a considerable amount of influence in determining whether net income is positive or negative, namely, change in fair value of financial instruments.

The below graph and chart both show how in years during which the company had negative net income (2011, 2010, 2008, 2007), the change in fair value of financial instruments exceeded or was a significant percentage of operating earnings.

(click to enlarge)

2013

2012

2011

2010

2009

2008

2007

2006

Change in fair value of financial instruments as a % of operating earnings

19.19%

-40.16%

-109.56%

-126.96%

36.44%

-247.20%

-74.69%

-1.54%

Thus, perhaps the low P/E valuation is due to the decrease in operating revenue from 2012 to 2013 or the fact that the change in fair value of financial instruments appears to be volatile and an important determinant of net income.

Another factor could be the company's liquidity situation. At first glance, liquidity looks fine. The current ratio and cash ratio appear strong and stable, as shown in the chart below.

(year ended Dec. 31st)

2013

2012

2011

2010

2009

Current ratio

6.43

6.18

7.36

1.20

4.76

Cash ratio

5.10

5.08

6.81

0.88

4.35

However, there was a large increase in the current portion of long-term debt between 2012 and 2013. When this line item and the current portion of other long-term liabilities are added to current liabilities, the current ratio and cash ratio actually have been deteriorating, as can be seen in the chart below.

(year ended Dec. 31st)

2013

2012

2011

2010

2009

Current ratio

1.15

2.57

2.74

0.80

4.76

Cash ratio

0.92

2.12

2.54

0.59

4.35

In conclusion, these two line items in particular ('change in fair value of financial instruments' and 'current portion of long-term debt') are two aspects that I will be looking closely at when the company announces results for the first quarter on April 28th. These two aspects appear to greatly influence how promising the company's fundamentals look, and therefore merit attention. Lastly, going back to the original premise with regards to the beta, I remain interested in this stock and will keep it on my watch list, yet find it may be important to acknowledge that risk could be greater than its beta suggests.

Finally, there are undoubtedly a plethora of other aspects to examine regarding SSW, and this article does not attempt or claim to cover them all. Thus, I encourage readers to perform their own analysis as well.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SSW over 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.

Source: Seaspan May Be Riskier Than Its Beta Suggests