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Shipping Stocks Look Good for Extreme Value Investors

Fahgetabout it (Brooklyn spelling).

Lots of mixed metaphors from the NY Post- a font of business knowledge for sure. There are different types of ships, the companies are not all the same, so I would shy away from vehicle encompassing all the sectors. But, yes, the industry is worth buying into.

The container guys (toys, electronics) may be waiting longer than drybulk guys (who already saw a pleasant and unexpected pickup this year) or tanker guys (where trade flows can shift dramatically in short periods of time).

Notwithstanding the above, in the container sector, I like SSW (huge Chinese exposure) if you insist on the consumer angle. In drybulk (rocks being loaded into boats), EGLE or DSX, and in tankers (crude oil) GMR.

The Gurus and the Little-Known Shipping Metric

Charters are done at whatever rates the market is at, when concluded. The spot rates swing wildly- were $5K per day (for big vessels) earlier this year- now building at base at $50K per day. There is also a term structure to rates- long term charter rates, say 1 or 2 years charter length, tends to be lower than spot (30 - 45 days voyage length typically) when the market gets overheated. So all that could explain the variances that you've seen. The related company thing is a whole Greek drama in many acts- too long for posting here and not directly relevant to discussion of the BDI.

My point was that the BDI is not a good indicator for most of the companies mentioned because they are not in the drybulk business. Even DSX, which is in that business, has ships mainly (all?) on term charters so they are not impacted by the daily ups and downs of the BDI. Companies often do "layering", ie charter at different times, sort of like retail stock buyers are urged to dollar cost average, keeps you from making bad decisions for ALL of your assets. Result would charters for similar boats at widely divergent rates.

But the BDI is a great indicator for shipping activiity in a few industrial sectors. It may correlate with macro indicators, but it's a correlation only- no causality of any type. So, it's runup says to me, yes the world economy is still breathing, it has a pulse, which economists have been starting to come around on since March. But dry shipping is vastly oversupplied right now, and it would take a sustained recovery in demand, and some pleasant surprises on the supply side (possible, but by no means not a sure thing) to lead to a real recovery in drybulk rates.

And, there are some tanker indices which may be better indicators for some of the stocks mentioned. OSG for example does have some spot tanker exposure so maybe Baltic Dirty Tanker Index (BDTI) might yield some good results. Seacor has nothing to do with either index, nor does Kirby but both obviously do better when energy activity is up, so there may be a correlation with the BTDI. I have not run the numbers but maybe someone has.

The Gurus and the Little-Known Shipping Metric

DSX has ties to the Baltic Dry Index, but its ships are mainly hedged out on timecharters now so the relationship is not day to day. TBSI may have ever so slight relationship if its multipurpose ships find their way into the spot market. But the others are not impacted by the Baltic Dry Index.

There are also a group of tanker indices published by the Baltic Exchange which you might investigate.

Barry Parker

Dryships' Questionable Deals Don't Help Investor Confidence

I think the post gets to the heart of the "problem". In situations where you have a private company and public company (albeit one where insiders own a lot), there is always a winner and always a loser once the dust settles. However, there are advantages to having private/ public deals...

The just announced four ship deal is intriguing because of the optionality aspect. With some adroit timing, if there is a blip upward the public company might excercise the purchase options on the vessels. So, that's the trade- relatively high amount of deposit and option premium goes from the public company to the private company, but the potential upside (for the listed entity) in the event of a positive market surprise would be quite substantial.

But, yes, any situation where the deals are not 100% arms length will arouse suspicion. But, on the other hand, having a privately controlled entity enables deals to stand still so ship purchases can be married with lengthy charters. In a purely arms length situation, it may be more difficult to put such combinations together. And the lengthy charters (to credit worthy counterparties- that's another post for another blog) are what the investors crave.

Dryships claims it has access to financing; I don't know if that's true, or not. I recently wrote an article for Janes Transp Finance where I surveyed bankers- those who talked to me (including some big guys) said that for existing customers, they could finance if the deal made sense.

Dryshippers: A Buy or a Sell?

Absolutely these indices and the underlying rates are very volatile. The shipping market has lost a lot of confidence- as evidenced by forward rates, in swap prices, have also come down.

But, I am bullish since I don't see any change in the fundamental demand picture. And, as pointed out, seasonality would suggest a pickup in Q4. Short term- various dislocations, yes, but China has not stopped producing steel. For stock traders, the shipping stocks present great zigs and zags because of the underlying volatility even in the context of a longer term trend (whether that be up, or down).

Dryship's Transformational CEO

Picking up on posts above, one thing about shipping stocks is that firms with more revenue visibility (often translated into bigger regular dividends) get more respect in the markets, in the forms of higher multiples. The spot markets are too risky, too volatile, for a company with a large fleet to be all spot. George and his peers (many other magnates also MIT educated) know this very well. Capesizes are put on long term charters at DISCOUNTS to current spot rates. See also SBLK for some good successes in this strategy.

What's been missing through the cycles and years (DRYS ipo was only in 2005) for shipping companies, public and private, is stability and students of the super-cycle know this. So, I agree that DRYS will be around for a while, and it will get bigger, I don't agree that it will continue to grow at exponential clips in perpetuity, as seems to be implied by the original post.

The rig biz, like shipping, requires huge capital, and ultimately cash flow based security (ie long term charters) will be attractive to lenders or bond buyers (let's not go there!!!) rather than purely asset based.

Dryships' Short Squeeze Potential

I brought up price to cash flow because George Economou's presentation at the Capital Link conference highlighted the low ratios. As I said, this was in the DRYBULK session, where I was sitting, only 30 feet away from the man himself, so mentioning tankers here goes off point. This is DRYBULK. The fact that drybulk rates exhibit some of the highest volatilities out there, and the fact that most other shipping stocks try to build in some stability (EXM is perhaps an exception), is why the ratios are so low. To reiterate, George Economou mentioned the ratios, I am a humble reporter to this blog who was sitting in the midst of the session at the Metropolitan Club. If George thinks they are relevant, than who am I to disagree?

Most analysts are looking at cash flow, and this includes in tankers, or alternatively at the NAV relationship to price. Depreciation does not figure into either of these, its an accounting fiction that's not relevant when asset prices can swing so violently. So traditional EPS is totally irrelevant in looking at shipping stocks and I would not devote a lot of time to it.

Don't get me wrong, I think DRYS could be a good stock for someone playing a spike. The ratio probably discounts more uncertainty than is warranted, if dissected analytically. But the people chartering, and the investors who got burned when the bottom fell out, are not analytical, they are emotional. I had success with a peer company last year in 4Q but I consider myself lucky rather than smart in selling at the right time. As long as the DRYS fleet is so overwhelmingly spot, there is going to be such a high uncertainty discount which is why those very hefty earnings are getting the "low" multiples as noted in George Economou's presentation. The same ratio translates back into the market cap being "low". By the way, George was not the only one lamenting this sorry state. Many of the CEO's were presenting their companies as undervalued on this basis. So, there are always good trading opportunities, but it's not industrial "buy and hold" shipping in the traditional sense.

Speaking of tankers, they did get a bump up when Frontline took a whack at OSG. That deal was possibly done while Freddy and Morten were sitting at dinner together the night before Capital Link in front of 800 of their closest friends, at another conference. Not sure where this will lead, but we can save this for another board.

Dryships' Short Squeeze Potential

George Economou gave an excellent presentation last Thurs at Capital Link, but, to be honest, many of the more conservative investors sitting in the crowd there (standing room only during drybulk sessions with special attention to DRYS and EXM) are spooked by all the volatility in the stock late last year. The forward market suggests flatlining of the spot market, then further falloff later in the year. So I would say that some jam-up of charterers in April (as ore season resumes) could ignite a "fire" in DRYS and cause the momentum boys to jump onboard. But, if this happens, don't confuse it with a really fundamentals driven run-up.

Shipping stocks were always historically very cheap in the pre 2007 days, so the low Price to Cash Flow could probably stand some upward correction, but traders more nimble than me will pick the right exit point after it spikes upward. The low P/CF reflect the inherant volality in the spot market. It's not the type of stock that you could put a kid thru college on, as long as they are overwhelmingly spot. I am neither short nor long here. I sold some peers back in October, right at the top, but would not attempt that tapdance again.

Dry Bulk Shipper Anomaly in Spot Pricing Creates Buy Opportunity

The charter numbers quoted actually made it into the Journal of Commerce, but the JOC never understood the freight futures market, now, did they?

There are very slight premiums for 2 Q 2008 settle on paper contracts,but overall, 2008 presents parity withs spot, at best, for Panamaxes and Capes. But do you really think that George Economou will put his fleet out on time charter to capture these numbers? He put three ships on period last Oct/ Nov at the peak. Out of thirty something, maybe forty in the fleet. The forward curve is downward sloping for a reason guys.

Two Shipping IPOs: Navios Maritime Partners, Global Ship Lease

7% is a good starting point. Recent OSG Master Limited Partnership came in a little over 7 %. "EGLE", a drybulk stock (vaguely a peer of NMM) comes in a little under 7 % depending on stock px.

But, anybody have any gossip about why French guys pulled the leasing IPO?