High-Risk Shippers Trading Below Half Their Book Value

by: Zvi Bar
Shipping has undergone significant volume reductions and increases since the financial crisis began. Many shippers expanded their fleets prior to the crisis. Shipping volumes have since declined and then stabilized, so far at least. The industry is left with the present overcapacity and concern over future demand increases and potential decreases. Moreover, much of this overcapacity development was leveraged, leaving several competitors with problematic levels of debt and an aging, relatively unused fleet.
This downturn pushed the index down and now several competitors within the sector are trading below book value, and also liquidated valuations, 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 domestic and 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. Below are the current statistics for the shippers I preciously identified as trading below half of book value.
DryShips, Inc (NASDAQ:DRYS)
  • Price to book value: 0.46
  • Short % of float: 4.7%
  • 2011-to-date performance: -26.92%
Eagle Bulk Shipping, Inc. (NASDAQ:EGLE)
  • Price to book value: 0.23
  • Short % of float: 11.2%
  • 2011-to-date performance: -46.78%
Excel Maritime Carriers, Ltd. (NYSE:EXM)
  • Price to book value: 0.13
  • Short % of float: 13.1%
  • 2011-to-date performance: -49.9%
Genco Shipping & Trading Ltd. (NYSE:GNK)
  • Price to book value: 0.20
  • Short % of float: 26.7%
  • 2011-to-date performance: -53.25%
Navios Maritime Holdings Inc. (NYSE:NM)
  • Price to book value: 0.49
  • Short % of float: 2.0%
  • 2011-to-date performance: -7.95%
Overseas Shipholding Group Inc. (NYSE:OSG)
  • Price to book value: 0.42
  • Short % of float: 38.5%
  • 2011-to-date performance: -29.87%
Paragon Shipping Inc. (PRGN)
  • Price to book value: 0.21
  • Short % of float: 1.8%
  • 2011-to-date performance: -46.07%
Their 2011-to-date chart:
[Click all to enlarge]

Many probably argued that these companies looked cheap at the start of 2011, but they are all since down, most considerably. Navios is down nearly 8% and is by the far the best performer since the start of the year. The other six are down at least 25%, with four (PRGN, GNK, EXM and EGLE) down between 46% and 53%. Nonetheless, over the last month, EGLE is up over 12%, with about half of that move occurring over the last week. Additionally, EGLE is the only of the seven above-mentioned shippers that is up over the last month. The last month’s chart:

The market appears to continue to anticipate 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 continues 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.