Capital Product Partners: Improved Opportunity

| About: Capital Product (CPLP)

Summary

Capital Product Partners increased the size of their fleet and earnings.

Capital Product Partners adjusted their dividend for long term sustainability.

The stock price adjusted accordingly and now targeting a 11.4% annual return.

Capital Product Partners is a good target for our 90-Day Investment Cycle that can generate higher returns through our process.

Capital Product Partners L.P. (NASDAQ:CPLP) is an international, diversified shipping company in the seaborne transportation of a wide range of cargoes, including crude oil, refined oil products, such as gasoline, diesel, fuel oil, jet fuel and edible oils, as well as dry cargo and containerized goods. As a publicly traded master limited partnership, CPLP has elected to be treated as a C-Corp. for tax purposes which is beneficial for U.S. investors (the investor receives the standard 1099 form). CPLP benefits from the commercial and technical management agreement with Capital Maritime & Trading Corp.

The company's fleet consists of 34 modern high specification vessels (2.5 million dead weight tonnage) with an average age of approximately 6.8 years as of December 31 2015. The fleet consists of four Suezmax crude oil tankers, twenty modern MR tankers, all of which are classed as IMO II/III vessels, nine post-panamax container carrier vessels and one Capesize bulk carrier.

On May 19, 2016, Capital Maritime & Trading Corp. announced that it has acquired 459,799 common units in open market transactions and that it entered into a Rule 10b5-1 trading plan (the "10b5-1 Plan") with an independent broker-dealer for the further purchase of up to 5,000,000 common units of Capital Product Partners L.P. Capital Maritime is CPLP's sponsor and the sole member of its general partner. Because purchases under the 10b5-1 Plan are subject to pre-determined pricing parameters, there can be no assurance that common units will be purchased under the 10b5-1 Plan. The company has over 120 million shares outstanding so the 5 million shares plus shares already owned would target near the 5% of the company stock. I would consider this purchase as insider trading as the sole owner of its common units.

Hyundai Merchant Marine Ltd (HMM), one of the company's largest customers in terms of revenues has engaged in a restructuring of its contracts could potentially result in a substantial loss of revenues.

On April 26, 2016 the board of directors announced the creation of a capital reserve, a related reduction in available cash distributable on common units and the resetting of the common unit distribution level to a new sustainable path of $0.075 per common unit and issued a new annual distribution guidance of $0.30 per common unit, with the expectation to maintain that annual distribution level through 2018.

Total revenues for the first quarter of 2016 reached $58.0 million compared to $48.9 million during the first quarter of 2015, corresponding to an increase of 19%. The increase is a result of the increased size of the fleet. Costs were up comparable with the revenue as the increase in operations.

The company recently took delivery of the last 2 ships of a contract of 5 from its sponsor, Capital Maritime & Trading Corp. The company has also secured new time charter employments for several ships for the next 12 months. These employments will keep the ships fully engaged over the next 12 months.

The Board decided to put aside $14.6 million in capital reserves for the quarter. This is a strategic; long term plan the company has the ability to, and fore-sight to prepare for opportunities and events in the future.

After taking into account the preferred interest in net income attributable to the unit holders of the 12,983,333 Class B Convertible Preferred Units outstanding as of March 31, 2016, the operating surplus adjusted for the capital reserves and the payment of distributions to the Class B unit holders before other cash reserves was $15.4 million for the quarter ended March 31, 2016. Operating surplus is a non-GAAP financial measure used by certain investors to measure the financial return and stability of the investment.

The net income for the quarter ended March 31, 2016 was $12.1 million. The result for the quarter ended March 31, 2016 was $0.08 net income per common unit, compared to $0.10 net income per common unit during the previous quarter ended December 31, 2015 and $0.09 net income per common unit during the first quarter of 2015.

Analysts Comment: I really like the board's awareness and effort to create and build a capital reserve fund. There will be opportunity to pay off debt, buy new ships, or expand in new areas as the opportunity presents itself. Vision in the board is usually focused on the next quarterly report and dividend to investors. This board is looking for opportunity in the future. This is a rare find with a forward-looking confident vision.

The fleet is still young and has a full slate of cargo with little to no down time for all its ships. Most are kept at over 90% engaged throughout the last 12 month period. Some maintenance down time is required and managed as needed.

Usually I avoid stocks that are priced as low as $2.63 per share. The stock price was $3.72 prior to the company's announcement of the lower dividend. Since then the stock price has adjusted and has steadied between, $2.53 and $2.75. With the ex-dividend date of May 4, we have some time to observe this stock and find a good buy-in point leading to the next ex-date. With the current quarterly dividend at $0.075 the yield is 11.4% (annual). I believe we can find a good buy-in point near $2.50 over the next 4-6 weeks where the yield would be near 12% (annual). The real opportunity would focus on the ability to buy the stock near $2.50 and sell prior the next ex-date at a price near $3.00. The yield on the short term buy and sell would be near 20% (for this quarter). The risk for trading with stock at lower prices can return higher yields, but bigger returns. With the stock already adjusting downward in price and dividend, my assessment is the stock price is likely to drop over the next 4-6 weeks near the $2.50 price and climb toward the $3 near the ex-date. There is a chance it could climb higher as more investors want to take advantage of the higher return, but even if the stock only climbed to $2.75, that would represent a 10% return for just this quarter.

Disclosure: I/we 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.

Additional disclosure: I will watch the stock and likely take a position in mid-June based on the guidance in the article. I invest in my processes I discuss in the article.