Excel Maritime Carriers: Sailing Ahead on Global Trade Expansion

As a follow through to the global trade theme anchored in our recent ProLogis (PLD) article, the dry bulk shipping sector is poised to go through similar expansion as the energy sector has gone through over the past five years. The difference is, this expansion is twofold, in tonnage and revenues and not just valuation.

The Theory of Relativity

Not Einstein's famous work, rather a parallel to the ever expanding universe. Relative to the global economy that has continuously expanded over the past five years (or more) capacity in dry bulk shipping has not kept pace. As shippers race to fill the gap, either by building more ships or keeping more [maintenance] costly older vessels afloat a while longer, the demand is poised to outstrip supply sending revenues up.

Or as Einstein would say; gravity warps space and time. In our analogy this means that the heavier objects (higher paying freight) pull the lower masses (lower priced items) towards them. Oil is already in orbit; now dry bulk is accelerating as it is drawn in by the gravitational pull of the energy mass.

Small players like Top Tankers (TOPT), better known for their oil tankers, have sold off some tankers to buy dry bulk ships. The trend has been noticed for the better part of 2007. Well known Dryships (DRYS) has gone from $40 per share in June to $121 in October. Lesser known Excel Maritime Carriers (EXM) is keeping pace rising from $25 in June to last Friday's 10/12/07 close of $70.58.

As with oil beforehand, upon the first double to triple, analysts came out by the droves stating that the stocks are fully valued. Of course this dismisses the next 100% leap. The variation between oil's and shipping's odyssey is the velocity with which the markets acknowledged the trend and recognized the timely performance of earnings by these companies. What took oil E&P company stocks three years to achieve, dry bulk transportation has done in four months. The energy sector's current (latest) 50% increase took 18/24 months, with a few exceptions like National Oilwell Varco (NOV) doing a hundred in six. We doubt that this translates to a 100% rise over the next four months for this transportation sub-sector, though less than 18 months is a possibility.

While investors were (are) preoccupied with all the glamour and glitz of high flying internet and gadget stocks, the shippers have been quietly steaming ahead. As they expand their fleets to accommodate growing demand, coupled with higher rates, revenue in general and earnings in particular should continue to outpace the energy sector. Today, the shipping sector is less volatile than the mining sector that could face a severe price correction for commodities that are not truly in short supply. Even at lower prices, commodities still need to be shipped and the dry bulk segment should make out just fine.

Refinancing Revelation

On 10/02/2007 Excel Maritime Carriers (EXM) announced that it was offering "qualified institutional investors" (the old boys club) $100M in convertible senior notes with a $25M over allotment cover. On 10/10/2007, EXM announced that it had placed $150M such notes with the boys, including the $25M allotment.

The notes pay a blissful 1.875% interest per annum! The catch is that these notes are convertible to common stock at a valuation of $91.30 per share. Also the longer it takes for EXM to convert the notes, the more shares are issued per face value. Do you think the boys know something that you and I don't? Perhaps, however there is certainly more to this than just concluding that EXM is being valued at $91.30. The way to view the deal is to imagine, if you will, buying options with limited downside risk. Also, investors can not cash-out without EXM's blessing so the common folk (shareholders) are protected.

EXM is using the proceeds to pay down debt and acquire two new Supramax ships expected to be in service before the end of 2007. This alone, increases EXM's tonnage capacity by 11% for 2008. Revenues are anticipated to increase in 2008 and coupled with lower interest payments on lower debt; earnings could grow 35-40% YOY. This is on top of a 100% growth rate projected for 2007.

With global trade expanding in accordance with universal expansion theory, China alone can provide enough impetus to keep this industry healthy for years to come. Antagonists are saying that 35% in 2008 is the end of the journey. We are saying it's just the beginning.

Clarifications:

• Passenger/cruise ships are a different ball game, not within the scope of this article.
• Dry bulk shipping is not dependant on the health of the U.S. economy.

Disclosure: No conflicts.

Comments

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