Edited by Kate Boehme
I am a big fan of Peter Lynch. He once quoted:
The key to making money in stocks is not to get scared out of them.
I think the above principle applies particularly well to the case of the Greek shipping stocks. The recent economic turbulence in Greece has caused investor sentiment to deteriorate substantially. However, despite the general pessimism, the shipping industry in Greece could still be an attractive source of profit.
The Greek Shipping Industry
The Greek maritime industry is one of the largest in the world. In fact, it is responsible for 20 percent of the Greek economy alone. However, companies like DryShips (DRYS), which engage in the maritime transportation of dry bulk and oil cargoes, continue to deal with a difficult economic environment. The recent global economic recession caused GDP growth rates for both developed and emerging markets to decline. As a result, shippers have been struggling with low demand for dry bulk commodities. This, in turn, has led to lower daily earnings rates.
Major industry players all over the world are most concerned about the prevalent oversupply of vessels. In evidence of this concern, ship owners in Greece are more reluctant to order Newbuildings, in comparison with previous years. Greek Newbuildings currently on order have declined significantly, from 601 in 2011 to 481 year-to-date in 2012.
At the same time, the old ships keep being retired. In fact, since 2009, the average age of Greek-owned fleets has followed a steady downward trend. In 2009, the average age of the fleet was 17.6 years old. Currently, it is just 14.7 years old. The scrapping activity in 2012 has exceeded historical levels. Greek ship owners have been determined to scrap more of the older vessels. This is particularly evidenced by the number of Greek ships over 30 years old; since 2011, the number has been reduced by 11.23 percent.
The Greek Economic Crisis and the Shipping Industry
At the moment, Greece is experiencing its fifth straight year of economic recession. Overall, the country's credibility among investors has been severely damaged. However, the Greek shipping industry does not actually seem to be affected by this turmoil. In 2011, Greek-owned companies controlled about 16.2 percent of global shipping capacity. In terms of nationally flagged and nationally owned tonnage, Greece remains at the forefront. Moreover, between 2000 and 2010, the shipping industry in Greece contributed $175 billion to the domestic economy. This contribution amounted to about half of the national debt in 2009. As John Lyras, chairman of the Posidonia Coordinating Committee, has stated:
Shipping is not part of the problem. We are part of the solution.
Greek Shipping Stocks
I think Greek shipping stocks are deeply undervalued due to negative investor sentiment over Greek economy. However, most Greek shipping companies operate on a global scale. As we observe some sort of recovery, I expect these companies to report better-than-expected profits. I particularly think Navios Maritime Partners (NMM), Navios Maritime Holdings Inc (NM) and Dryships are deeply undervalued.
DryShips' year-to-date stock return stands at 15.50 percent. The stock trades at attractive valuations. Price-to-book value ratio is just 0.24, and price-to-sales ratio is 0.79. The stock is trading about 29.14 percent above the 52-week low, and 42 percent below its 52-week high. On the negative side, for Q2 2012, the company reported a net loss of $18.2 million. This loss was mainly attributed to lower net voyage revenues in the dry bulk carriers segment. On the other hand, for Q2 2012, adjusted EBITDA was higher by $8.4 million as compared to Q2 2011. Moreover, the gross margin for this company is notably high, standing at 53.62 percent. As I stated here, Dryships' 65% ownership in Ocean Rig (ORIG) translates into an asset valuation of $1.3 billion. At the current market cap of less than $1 billion, the stock is priced below its subsidiary.
Navios Maritime Partners is one of the top dividend payers among its peers. The trailing dividend of $1.77 per share translates into a yield of almost 12.5 percent. Navios Maritime Partners has a profit margin of 33.96 percent. The stock currently trades at the middle of its 52-week trading range. The company's price-to-earnings ratio is 10.93, indicating a cheap stock. It is also worth mentioning that Navios Maritime Partners shows strong financial performance indicators and sound control of expenses. The current ratio is 1.13, and the debt-to-equity ratio is just 0.48. Meanwhile, the general industry debt-to-equity ratio stands at 1.39.
Navios Maritime Holdings is also a highly profitable stock as I stated here. The company has a profit margin of 13.16 percent and pays a dividend of 6.54 percent. At the moment, the stock trades at desirable valuations. The price-to-sales ratio is 0.52 and the price-to-book value ratio is 0.33. Overall, Navios Maritime Holdings is an intriguing investment. The company's total debt-to-equity ratio is close to the industry average of 1.40. However, its current ratio of 1.50 remains much higher than the industry's same variable. Finally, the return-on-assets and return-on-investment ratios amount 3.00 percent and 3.60 percent, respectively. When compared to the industry's same ratios of 0.20 and 0.30, respectively, Navios Maritime Holdings reveals its strong management efficiency.
While uncertainty over the future of the Greek economy remains evident, Greek shippers keep fighting for survival. So far, their fight has been successful. Even though conditions are harsh, Greek shipping companies have remained profitable and able to pay dividends. These continued high performance rates are clear evidence of each company's high management standards and strong commitment to shareholders. As mentioned in a previous article, analysts suggest that world economic trends will start to pick up in 2013. According to IMF projections, in 2013, the world GDP growth rate is estimated to reach 6 percent. Also, the rate of annual change in world trade volume is expected to achieve a 5.6 percent level in 2013. If these estimations are proven correct, global demand for dry bulk products will revert to pre-crisis levels. Hellenic shippers not only will have survived the shipping crisis, but they will have emerged from it stronger than ever.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.