Shipping can undergo significant volume reductions and increases. Many shippers expanded their fleet prior to the recent collapse in real estate production. Shipping volumes have since declined and then stabilized, where the industry is left with the present overcapacity and concern over future demand. Moreover, much of this overcapacity was leveraged, leaving several competitors with problematic levels of debt and an aging unused fleet.
This downturn to the shippers pushed the index down and now several competitors within the sector are trading below book value, with fear of bankruptcy and/or selling off ships. Selling of ships may only occur after certain bankruptcies, should would-be buyers be current bondholders. The shipping business is fragmented and the overcapacity could keep margins low. Many issues could affect shipping, including potential European failures, Asian recessions and further Middle East instability, among other risks. Shipping demand can also eventually grow to where present capacity cannot satisfy it.
This business cycle is common and usually results in some companies failing while others survive, stronger and/or with greater market share. The survivors are still unknown, which creates uncertainty and potentially undervalued equities. Many shippers continue to trade well below book value with several holding high levels of debt. At the start of June, I identified seven shippers that the market had already priced for significant risk, and which are trading well below book value:
DryShips, Inc. (DRYS)
- Price to Book Value: 0.46 (was 0.44)
- Short % of Float: 5.6%
Eagle Bulk Shipping, Inc. (EGLE)
- Price to Book Value: 0.22 (was 0.26)
- Short % of Float: 11.1%
Excel Maritime Carriers, Ltd. (EXM)
- Price to Book Value: 0.14 (was 0.16)
- Short % of Float: 12.5%
Genco Shipping & Trading Ltd. (GNK)
- Price to Book Value: 0.23 (unchanged)
- Short % of Float: 23%
Navios Maritime Holdings Inc. (NM)
- Price to Book Value: 0.49 (was 0.52)
- Short % of Float: 2.2%
Overseas Shipholding Group Inc. (OSG)
- Price to Book Value: 0.48 (was 0.44)
- Short % of Float: 33.4%
Paragon Shipping Inc. (PRGN)
- Price to Book Value: 0.24 (was 0.29)
- Short % of Float: 2.7%
Their 2011 chart to date: (Click to enlarge)
Over half the above-named companies have continued to lose share-value relative to their book value this month. Conversely, during June DryShips and Overseas appreciated relative to their book value and Genco remained stable. Nonetheless, all of these seven high-risk shippers now trade below half of their book value.
The market appears to be anticipating that at least some of these shippers have a high probability of exiting the market or further diluting shareholder value to sustain their businesses. A very likely occurrence continued to be that one or several shipping competitors exit the market, and that the remaining survivors absorb the market and capacity. Additionally, some competitors may merge or acquire others where opportunities are seen.
These companies offer significant risk and potential returns. Their ownership should be limited in most fiduciary accounts, though some exposure to shipping and transportation is generally considered appropriate.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.