SeaCube Container Leasing: Choppy Waters for Such Valuable Cargo

| About: Seacube Container (BOX-OLD)

Firm Background

SeaCube Container Leasing (NYSE:BOX-OLD) buys cargo containers used in intermodal shipping. Intermodal shipping means that the cargo containers SeaCube buys can be loaded on trucks, rail, or ships. The company makes money by renting its cargo containers to shipping companies who use them to transport goods that need to be delivered.

Industry Background

I never invest in a company whose operations I do not understand. One of the reasons I like SeaCube is because their operations are very easy to comprehend. As mentioned above, SeaCube buys cargo containers and then rents them. We have all seen cargo containers – whether we have seen them passing by on trucks, trains, or ships. Further, it is easy to see how SeaCube makes money –by renting cargo containers to companies that have goods to transport.

SeaCube’s Niche

When considering the shipping industry, an obvious question arises: Why would a shipping company want to rent cargo containers – wouldn’t they rather buy them? The answer to this is simple: No. Shipping companies do not want to tie their money up expensive cargo container units. Since a shipping company only earns money if it has goods to ship, many shipping companies prefer to rent cargo containers as they are needed. By following this strategy, the shipping company has cargo containers on hand only when they have goods to ship.

SeaCube is one of a variety of companies that rents cargo containers to shippers. By renting to many shipping companies, SeaCube is not tied to the fate of any one shipping company. Thus, SeaCube’s business is tied to the state of the overall shipping industry rather than to any one company.

Why SeaCube’s Current Stock Price Represents A Great Opportunity

SeaCube recently IPO’d. Thus, it is a stock that is not yet widely followed by analysts. Although SeaCube initially proposed IPO’ing its shares at $16 - $18 dollars, the market only supported a $10 valuation. However, SeaCube’s projected earnings per share for 2010 is $1.40 - $1.45 (see here).

The Turn

It is no secret that the world is experiencing a slow period of growth. However, the cargo container industry has responded by virtually ceasing production of new cargo container units. Accordingly, SeaCube in its prospectus noted it is likely there will be a shortage of cargo container units in the near future (see here). I take this directly from page 88 of SeaCube’s prospectus which was filed with the SEC:

Outlook for Container Leasing

The data considered above indicate a favorable outlook for the container leasing industry as a whole over the next several years for the following reasons:

Virtual cessation of new production in 2009 The near complete cessation of new container production and the effect of normal fleet attrition in 2009 meant that equipment surpluses began to decrease in the second half of 2009, and resulted in growing shortages in the first half of 2010.

Reduced production capacity Container manufacturers closed several factories and significantly reduced their workforces in 2009. It has taken some time to re-open factories, re-stock production lines and retrain workforces. Production of approximately 800,000 TEU in the first half of 2010 was insufficient to meet demand.

Growing demand for containers Demand for containers is increasing because of renewed trade growth and the progressive introduction of slow steaming, which means that operators require more containers in their system to deliver the same amount of cargo.

The Opportunity

Not only will SeaCube experience increased demand for its services as the world economy grows, but its share price seems very undervalued on a peer-comparison basis. Assuming SeaCube earns the low-end of its guidance ($1.40 per share) in 2010, it is currently trading at a forward P/E multiple of 8.57. Compare SeaCube’s forward P/E to other competitors TAL International Group (NYSE:TAL) and Textainer Group Holdings (NYSE:TGH), which sport forward P/Es of 14.5 and 10.5, respectively.

Couple SeaCube’s low forward P/E with the fact that there is already talk of cargo container shortages and it is not hard to see how SeaCube investors should be well positioned to earn significant investment returns in the mid-to-long term (see here, here, here and here).

A conservative estimate of SeaCube’s current value can be obtained by multiplying its projected earnings by its competitors forward P/E ratios, as there is no reason SeaCube should not trade at those levels. Doing so results in an estimated current value of between $14.70 per share ( $1.40 x 10.5) and $20.30 per share ($1.40 x 14.5). This suggests that SeaCube’s stock is currently undervalued by 22.5% to 66.7%.

Factoring in global economic growth, a cargo container shortage, and the fact analysts have not yet discovered SeaCube’s stock makes me believe the true value of SeaCube’s stock is worth much more than $20 per share. Thus, I am content to have a significant portion of my portfolio invested in SeaCube’s stock waiting for my ship to come in.

Disclosure: Author is strongly long BOX