Navios Maritime Poised For Substantial Growth

Navios Maritime Holdings Inc. (NM) is a worldwide leader in the Trans-Ship industry and one of the leading global brands with a vertical integration as a seaborne shipping enterprise. The company is based in Piraeus, Greece.

The company specializes in trading, storing and offering carriage, along with other related logistics for international dry bulk cargo transportation, in a various range of drybulk commodities including iron ore, coal, grain, raw materials and fertilizer. Navios Maritime charters its vessels to a diversified group of companies, including strong counterparties, such as BHP Billiton (BHP), Cargill International, Mitsui O.S.K. Lines and COSCO Bulk Carrier.

The company has two reportable segments: Vessel Operations and The Port Terminal, which respectively consist of transportation and handling of bulk cargoes through ownership, operation, trading of vessels, freight and forward freight agreements and Port operation and transfer station terminal.

Navios Maritime's current core fleet of 38 active vessels operates under long and medium-term charter-out contracts, aggregating more than 3 million deadweight tons with contracts to take delivery of seven additional vessels bringing its total controlled fleet to 45 vessels aggregating close to 4 million deadweight tons. Its fleet consists of Capesize, Panamax and Ultra-Handymax vessels.

As of December 31, 2006, Navios owned 10 Ultra-Handymax (50,000 dwt-55,000 dwt), 9 Panamax (70,000 dwt-83,000 dwt), 1 Capesize (approximately 100,000 dwt) and 1 Handysize (10,000 dwt-30,000 dwt) product tanker vessels. It also time charters in and operates a fleet of 4 Ultra-Handymax, 1 Handysize, 14 Panamax, and 5 Capesize vessels.

Navios Maritime Holdings Inc. also owns and operates a bulk transfer and storage port facility in Uruguay, which is one of the most successful and prominent operations of its kind in South America. The company maintains offices in Piraeus, Greece, South Norwalk, Connecticut and Montevideo.

Key Points

Increased connectivity and interdependence of the world's markets and businesses in the last few years has resulted in a significant uptrend in relation to trade and overall economic growth throughout the world.

Emerging markets in Eastern Europe and especially in the Asia-Pacific rim continue to record strong growth and momentum with Chinese and Indian markets as the main driving forces. Demand from China's coastal dry cargo is estimated to grow over 40% in the next five years alone, requiring the capacity of an additional 236 Panamax vessels to be operational.

As things currently stands, the worldwide supply and demand logistics continue pointing to deficient global shipping capacities. Surge from China's demands in relation to dry commodity along with unprecedented strength in other emerging markets, has made the dry bulk segment currently a booming one. Orderbooks are in the rise but the current vessel supply it is not meeting the need for ton-mile demand, thus making the situation an intractable disposition.

New vessels won't be coming into the market until 2010. It takes an average of two years to build a new ship and, in the meantime, out of 350 ships needed to meet demand , 200 only are projected to be operational at the earliest by 2010. As result, supply versus demand imbalance aspect will inevitably allow for congestion in the segment, where business backlog and contracts will continue to record at high rates and in the process draw excess shipping capital prompting BDI - The Baltic Dry Index - to constantly print higher levels.

Much has been alluded recently, whether by analysts or industry observers, of the dry bulk run as an exhausted one at present levels and heading for decline with bubble characteristics. I would like to counter that argument with a simplistic approach, always excluding here the cyclical aspect of this specific market.

The Baltic Dry Index is a leading indicator for economic growth and production. Talking about bubbles and exhaustion in relation to segment, at current levels, suggests perhaps missing the main point. Significant increases in demand are pushing the index sharply higher and BDI's chart is only reflecting that demand.

In this particular segment we are not dealing with container ships carrying finished goods, with a completed manufacturing process but not yet sold or distributed to the end user. We are instead dealing directly with 'production' since bulk carriers do carry building materials, cement, coal, grain and iron. Unlike the stock market, the BDI completely lacks the ability for speculative content and, if anything, movements in the Baltic Index usually do precede movements in global stock markets.

The major growth component of dry bulk segment remains China's arrival in the world sea trade canvas, making it a key driver in the dry bulk volumes growth. This aspect has given and it will continue to give into the near future the dry bulk shipping industry leaders such as Navios Maritime Holdings room for additional expansion business-wise since exponential growth expected in the volumes of sea trade is very much an actual and ongoing occurrence.

Key Numbers

Navios Maritime Holdings has a market cap of $1.82 billion with a peg ratio of only .34. Price book records at 3.14. Profit margin trailing twelve stands at 14.44% with 28.36% in operating ones. 12.34% of ROE. Revenues stand at over $340 million for a gross profit of $122 million with a net income of almost $45 million.Operating cash flow $114 million with 371% growth in quarterly earnings yoy.

On October 30th, the company reported third-quarter earnings doubled and revenue quadrupled, driven by more contracts serviced, higher rates, and more operating days. Profit reached $36.5 million, or 34 cents a share, from $16.9 million, or 27 cents, in the year-earlier period. Shares outstanding rose 74% to 108.3 million. Revenue rose to $212.9 million from $50.9 million. yoy growth revenue/wise came in at 318%, net income yoy 116%, ebitda yoy 65%.

Conclusion

Navios registered strong operational and financial result in this last quarter of fiscal '07. The company robustly delivered growth across its business segment. With its excellent market position, solid customer relationship and moreover, as management carries out its strategy of fleet expansion, the company is expected to create new opportunities which subsequently will lead to growth in major areas of the trans-ship industry.

My take is that the company is poised for substantial growth. It is one of the largest dry bulk operators with a young fleet of average age of 4.6 years. It has a proven ability to grow fleet. Company expansion and future growth will continue to be secured through corporate acquisition and chartered-in vessels. The company's operating cost, which is lower than industry average, is also a very significant detail.

With strong global demand and limited new supply through 2010, combined with sound company fundamentals, this stock comes with a buy recommendation from current levels with a price target of $24-26 within a six months time frame.

Comments

[voidoid99]

This stock will tank ASAP The IPO will dilute their shares SELL NOW

[Pah-leeze]

(I asked this question on the Y! Finance boards as well - nothing doing there, so thought I might ask here.)

Before I get to my point, one thing. I'm currently long NM. I like the growth prospects, I like the management, and they seem to be going in the right direction.

That said, something concerns me - margins.

Why does NM have inferior margins to what seems to be all of its competition? Does anyone know? I've sifted through everything I can find and don't see a good indication.

Note - these are taken from my broker's fundamental #'s, I think they are more recent that Y! Finance. I'll only list three other drybulk shippers here.

NM
Gross Margin (TTM) 30.2%
Net Profit Margin (TTM) 13.4%
Operating Margin (TTM) 23.5%
Pretax Margin (TTM) 14.1%

DSX
Gross Margin (TTM) 78.1%
Net Profit Margin (TTM) 56.4%
Operating Margin (TTM) 59.7%
Pretax Margin (TTM) 56.4%

GNK
Gross Margin (TTM) 79.9%
Net Profit Margin (TTM) 42.7%
Operating Margin (TTM) 54.3%
Pretax Margin (TTM) 42.7%

DRYS
Gross Margin (TTM) 93.6%
Net Profit Margin (TTM) 60.1%
Operating Margin (TTM) 73.1%
Pretax Margin (TTM) 60.1%

What gives?

[Pah-leeze]

To clarify, I think I see why (numerically) their margins are so much worse...their cost of revenue is really crazy as a % of total revenue vs the competition. What I'm trying to understand is WHY that is.

I.e., Cost of revenue vs. total revenue for these co's:
NM 161m vs. 212m
DRYS 6m vs. 112m
DSX 8m vs, 43m
GNK 8m vs. 45m

The SG&A, depreciation, etc, are all pretty close for all four companies. The cost of revenue just seems outlandishly high for NM.

I.E., it's taking them like 20x the expenses to generate 2-4x the revenue of the others. And it's been that way all of the last four quarters. Why? :P

[long termshippinginvestor]

Ron, Great analysis !
Agreed entirely with the future potential of NM given the current positives on the bulk industry.
One question for you is "what is the benefit to NM to have its subsidiary listed ?"

Thanks.

[Are YouKidding?!]

good article on shippers here:

www.greenfaucet.com/te...

[adrian]

Has anyone seen any SEC 10k reports for this company lately?
I can't find any. I wonder if is completely above board. That
subsidiary seems like a book-cooking scheme to me. And its
growth is too good to be true - we're talking 30% EVERY QUARTER in 07. This is shipping, not ipods. They could be just making up numbers and who would know (greek company)? Furthermore every board member is about 42 years old and joined in October 07.