Good Time to Buy a 'Little' Shipping

Within the last two weeks, both TheStreet.Com and Motley Fool have come out with articles recommending the purchase of shipping stocks. The recent surge in the Baltic Dry Index is certainly an excellent reason. Since the low of this year, the BCI has surged from around $80,000 to $230,000+. The BPI has surged from around $40,000 to $80,000+. The BSI has surged from around $40,000 to $66,000+. The BCI has surpassed its 2007 high. The BPI and the BSI are nearing their 2007 highs. The shipping stocks are still significantly below their 2007 highs. The experts are predicting the Baltic Dry indices are going to go significantly higher this year.

Still there are more reasons. Due to the credit crunch, the shipyards have cut back on building, as both they and the buyers are having a harder time getting credit. This situation should lessen the competition in the shipping industry over the near term. It should further drive up prices. China and India still have the huge demand for raw materials that generally have to come in by ship. In addition, the recent earthquake in China damaged the some of the rail lines there. A good portion of the freight that used to move by rail in China will have to move by ship temporarily. This should further push prices up, especially for the smaller vessels, which will likely be used to move the materials along the Chinese seacoast.

DryShips (DRYS) and Excel Maritime Carriers (EXM) are two of the shippers who have done well in the recent past. Yet the analysts don’t seem to like them that much. They have mean recommendation values of 2.9 and 3.0, respectively. It seems these stocks will likely do well regardless. DRYS still seems to be the industry leader.

Still, this time around the small shippers may be the stocks to buy. The following three are well liked by the analysts: 1) Navios Maritime (NM) (mean recommendation = 2.0), 2) TBS International (TBSI) (m.r. = 2.0), and 3) Star Bulk Carriers (SBLK) (m.r. = 1.7). NM (PE = 4.19) recently bought a whole fleet of small vessels for use in South America. This fleet is supposed to provide an immediate 35% EBIDTA increase for NM when it begins operation. This fleet is supposed to begin use by Q4 of 2008. NM is supposed to grow EPS from $1.02 in 2007 to $1.22 in 2008 to $1.88 in 2009. The current price is $11.23. The average 1 year target price is $17.40. TBSI (PE= 9.61) is supposed to grow EPS from $3.31 in 2007 to $6.34 in 2008. The current price is $44.23. The average 1 year target price is $72.60. SBLK (FPE = 6.87) is supposed to grow EPS from $0.11 in 2007 to $1.45 in 2008 to $2.03 in 2009. The current price is $13.95. The average 1 year target price is $18.

With the current shipping shortage (and the concurrent Baltic Dry Index rise), these figures may all be significant underestimates. All three of these stocks have been beaten down recently, especially last Friday. They have taken more abuse because they are not the industry leader that DRYS is. Now may be a good time to buy them. These smaller shippers may also be ones that benefit from the temporarily ruined rail lines in China. The target price, analyst recommendation, and earnings information data are from Yahoo Finance.

Disclosure: Author holds long positions in the above-mentioned securities

Comments

[squeezerb:]

I don't understand how you can include a newly acquired company and not mention FREESEAS (symbol:free). they have a 1.7 analyst recommendation, fabulous revenue (see their website for the contractual day rates and you will see that yahoo finance grosslly understates their revenue), a book value above the current price of the stock, and an incredible dividend. PLUS, they are small enough to be a future takeover candidiate.

2008 Jun 10 08:39 AM

[hannah007:]

This is a rediculous thesis.
BDI already made new highs but the stocks didn't
PE Ratios used are not valid for this industry
Institutions show little interest- Tranparancy and volitilty issues
Market caps below Institutional threshold, >5B

2008 Jun 10 09:39 AM

[ritr54:]

SBLK has warrants; does anyone know the strike price and expiration date please?

2008 Jun 10 11:22 AM

[Eric in IL:]

Have you checked out Capital Link Shipping - the industry reports are showing some flattening. The BDI is completely overbought. I have June $40 puts on TBSI, seems more volatile than the rest and getting a nice payday today.

2008 Jun 10 01:12 PM

[jimmy46:]

the earthquake occurred in central china, some distance from the ocean,
How are they going to use ships there?

2008 Jun 10 02:06 PM

[d_teller:]

Interesting analysis: to jimmy46, an idea, if you can't move coal by rail, you can by ship.

There's a concurrent review of shipping by a Mr. Sun at this site today, and with a somewhat calmer set of comments.

2008 Jun 10 08:03 PM

[David White:]

jimmy46: the point was that the earthquake disabled a some of the rail lines. The obvious answer to your question is that there are usually rail lines directly to and from the coast. The ships would provide the leg down the coast.

E-money: I would be very careful with the puts on TBSI. You may be doing okay at the moment. However, the market has been tanking. All growth stocks are doing the same. Look at solar as an alternate example. There is some support at 1350 on the S&P500. It looks like the market has temporarily bounced. I personally am hoping that level will hold. Certainly there was bad news from the banks (new bad loans noted) in the last few trading days (Lehman has assuaged some of that angst by raising more capital). Oil recently skyrocketed 12% in one day. These kind of things will bring any growth stock down. If the market rebounds, the "little" shipping stocks mentioned will likely do well. Further NM has options to buy many of its "Chartered-In" ships for values much less than the current ships' values. It has an excellent Price to Book Value ratio in addtion to great earnings growth. I also see the expansion in South America as a great strategic move.

2008 Jun 11 02:31 AM

[Mikelandia:]

With companies like prgn and ocnf booked through 2009 it appears the dividend streams will be secure (fuel costs permitting). Considering the increase in market volatility due to elimination of the uptick rule and selloff in anticipation of the "summer doldrums" the arteries of the global economy are excellent inflation hedges as they ship inelastic demand items for infrastructure and energy. A ship is a ship, a u.s dollar is an i.o.u from the citizens of a country who are in a productivity free fall and coping with massive government incompetence for the last 8 years. Most assets yes even housing should adjust upwards to offset what will be a continued free fall of the u.s dollar now that the monopoly of education has been shattered by web 2.0.

That said. The shippers with massive yields to be sought as investors give up on growth to seek shelter from the summer storms should provide incredible upside with low fundamental risks and yields that provide healthy investor cashflows. America is for sale. To trade assets for greenbacks is like selling Manhattan for a bucket of beads and trinkets.

2008 Jun 11 11:18 AM

[jimc:]

Hey great call . Good time to buy some shipping LOL . Take a look at EXM since your pathetic recommendation. In fact look at the whole sector.

Now stand back and throw that dart again LOL !!~!

2008 Jun 11 05:08 PM

[calimi:]

Who pays usually for the fuel? The shipping company as an obligation (and included in the final cost) or the contractor? I read two complete different opinions about this issue. Considering the present cost of the fuel this is going to make a HUGE difference, especially for the shipping companies that signed long term contracts.

2008 Jun 11 07:14 PM

[einstein p ...:]

EXM and DRYS are both getting killed along with the rest of the group. The chart looks like they fell off a cliff in the last week. Coal, iron ore, fertilizer, and grain are in heavy demand and demand has not slackened. Those commodities will need to be shipped by dry bulk ships and companies like EXM and DRYS can pass those rising oil costs to end customers on the spot market. The only companies that can't are ones that are booked out for several years and I would imagine, like the airlines, they hedge their fuel costs. Still, I wouldn't try to catch a falling knife. This group is getting trounced.

2008 Jun 12 02:41 PM

[FRANKLIN32:]

Would agree, on the falling knife but DRYS looked like it was slowing yesterday (June 12) and may work itself back up. Their was a article posted that a fund manager sold all his shares at one time. This might of triggered a sell in the stock (it didn't mention why he was selling)? I find the stock cheap with a P/E 4.6 (hard to resist putting a little in your portfolio). Would suggest you buy pieces vs. the whole pie!


On Jun 12 02:41 PM einstein p fleet wrote:

> EXM and DRYS are both getting killed along with the rest of the group.
> The chart looks like they fell off a cliff in the last week. Coal,
> iron ore, fertilizer, and grain are in heavy demand and demand has
> not slackened. Those commodities will need to be shipped by dry bulk
> ships and companies like EXM and DRYS can pass those rising oil costs
> to end customers on the spot market. The only companies that can't
> are ones that are booked out for several years and I would imagine,
> like the airlines, they hedge their fuel costs. Still, I wouldn't
> try to catch a falling knife. This group is getting trounced.

2008 Jun 13 08:18 AM

[Clavis:]

squeezerb has just given me more homework!

2008 Jun 18 05:31 PM