Value Investors seek opportunities in companies where the intrinsic value is less than their market capitalization. The bulk shipping industry should be no exception to this fundamental rule.
In this article, I compare the intrinsic value per share for three shipping companies, namely Baltic Trading Limited (BALT), Eagle Bulk Shipping (EGLE), and Genco Shipping & Trading Limited (GNK), relative to their stock price. All three companies specialize in the dry cargo segment of the industry.
Baltic Trading Limited owns a fleet of 9 vessels (with a total DWT capacity of 672,000 MT and average age per vessel of 2.7 years), and has a market capitalization of $69 million.
Eagle Bulk Shipping Inc. owns a fleet of 45 vessels (with a total DWT capacity 2,451,000 MT and average age per vessel of 5.3 years), and has a market capitalization of $52 million.
Genco Shipping & Trading Limited owns a fleet of 53 vessels (with a total DWT capacity of 3,812,000 MT and average age per vessel of 7.1 years), and has a market capitalization of $145 million. Genco is the parent company of Baltic Trading. It has a 25% interest in BALT, but due to a dual share structure, it exercises full ownership and managerial control.
I based my analysis on net asset value as proxy for intrinsic value. I believe that net asset value is superior to book value because it is based on market inputs as opposed to historical figures. Also current distressed asset valuations in the shipping industry have rendered carrying asset values based on historical costs irrelevant. On the table below, you can see that the difference between carrying values and fair market values for the three companies ranges between 38.1% and 53.1%. In dollar terms, the asset impairment ranges between $139 million and $1,267 million! For micro-cap companies, these differences are too material to ignore.
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Please note that none of the companies in our study has actually recognized an impairment loss yet. Under U.S. GAAP reporting rules, companies have greater flexibility when testing for impairment losses, than under IFRS reporting rules. I would be very curious, however, to see if this remains the case by year-end.
For reference purposes, please note that when Paragon Shipping Inc. (PRGN) recognized an impairment loss for nine of its vessels on December 31st, 2011, the loss was equal to 64.1% of the carrying value.
Also please note that impairment losses are non-cash items, and the Street has already discounted such losses in the share price (how accurately we will find out shortly).
On the table below, I present the NAV and price-to-NAV ratio for the three shipping companies in my study. Please note that I have calculated the net asset values as of June 30th, 2012. (Baltic Trading disclosed the fair market value of its fleet in its quarterly report filed on August 9th, 2012. Genco also disclosed similar information in its quarterly report. Eagle only disclosed fair market figures in its 2011 annual report. I calculated Eagle's fleet fair market value as of June 30th, 2012, based on the Baltic Exchange BSPA index).
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It is very interesting to note that the Street has not priced all companies similarly, at least not in terms of NAV. Baltic Trading appears to be a bargain trading at 0.55 times its net asset value. Genco appears overpriced at 1.71 times its NAV. But then again, it is a relative bargain compared to Eagle that sports a negative NAV of ($9.23) per share.
Please note that price-to-NAV ratio is just one, albeit very important, valuation tool. Net asset values reflect break-up values that are currently well below the historical average. On the other hand, shipping asset values have historically experienced wide variations. In this distressed freight market environment, potential investors should also look at other key factors such as debt leverage, loan repayment schedule, covenant compliance, operating income visibility etc.
Yet for value seeking investors, Baltic Trading should be the company to focus their due diligence on. I plan to present a comprehensive investment case for Baltic Trading in my next article.
Additional disclosure: I have no positions in any other stocks mentioned. I have no plans to add to or liquidate my BALT holdings within the next 72 hours.