Kirby Corporation (NYSE:KEX) equity had an incredibly rough end to 2015, falling 40% from the peak in July to the depths of the low $40s/share that the equity found in early January. The barge operator's shares have since rallied very strongly, and now the company sits right in the middle of its fifty-two week range. Was this move justified? Are the company's margins and business opportunities going to stay intact in the long-term, and does the company have sufficient liquidity to cover its obligations?
There is no doubt that Kirby Corporation has some serious secular issues it is facing within its business. Kirby Corporation is in the business of moving goods; primarily along inland river systems along the Mississippi River and all along the U.S. shoreline on both coasts and the Gulf of Mexico. While the U.S. inland and coastal waterway systems remain an important means of transporting goods in the United States, the company relies on high volumes of commodities being transported. Volumes have understandably fallen as commodity prices have slipped, just as new operators in the business opened up shop and pushed up the available barge counts. It isn't a surprise that shipping prices have fallen as competition has entered into this soft market, and the resulting margin pressures aren't a surprise either. As a result, revenue declined 16% in 2015, with another fall of 10% or more to be expected in 2016. Upcoming contract expirations will almost certainly be renegotiated lower, bringing more margin compression back into the picture. Earnings per share fell nearly 20% from the 2014 peak, with a further fall set in concrete for this year. Management guidance of $3.00-3.50/share for 2016 is a pretty wide target, and is representative of the incredible volatility that is currently present in this business. It is no surprise that short sellers are circling, and have now boosted short interest in the company's shares.
However, there are bright spots for Kirby according to bulls. As the largest operator of inland and offshore tank barges in the United States, the company has significant market share that give it some weight to throw around in this market. Furthermore, unlike smaller peers that have tried to break into this space, leverage remains low.
Demand may turn as well in the future. With petrochemical plant expansions planned all along the Mississippi River over the coming years, Kirby will likely see a demand boost for barge transportation here which could offset falling crude oil and condensate shipping volumes. The recent lift of the ban on the export of West Texas Crude could see additional crude oil movements down from oil-producing states in the Northeast towards the Gulf of Mexico for export.
Disconnect Between Markets and Analysts?
I'm not the best expert on the shipping markets and their potential recovery. I do know, however, that a big turnaround by the market isn't necessarily in the cards, at least according to professional analysts. 2017 estimates range from $3.20 to $4.22/share, and earnings estimates for 2017 are down on average from $4.43/share to $3.56/share on average during the past 90 days. That represents a massive shift in sentiment from the professional community.
This is a continuation of 2015's trend, which saw 2015 earnings estimates from the Street fall from a high of $4.88/share as the company and its markets continued to deteriorate. The company eventually reported $4.11/share in earnings, more than 15% below initial expectations heading into 2015.
Kirby Corporation has avoided outright downgrades thus far, but that appears increasingly likely as sell-side opinion and the share price continue to head in opposite directions. A wave of downgrades could put significant pressure on the stock, exhaust momentum, and push it back down towards recent lows.
With the company holding just $6M in cash at the end of 2015, questions regarding the company's solvency have come up in the past. This is a question I can address. Liquidity is incredibly important to this company's ability to operate, but is it a problem here? Once you dig deeper, the answer is no. The current $550M revolving credit which matures April 30, 2020 is currently priced at LIBOR + 1%. The company has currently drawn $279M, leaving $271M available for withdrawal. As a result, there is plenty of wiggle room left on borrowing capacity, but the revolver does have covenants:
Interest Coverage. EBITDA/Interest Expense for ttm cannot be less than 2.5. Debt to Capitalization. Funded Debt/Total Capitalization equal to or exceeding 0.6
For 2015, Kirby Corporation's interest coverage ratio was extremely high; EBITDA came in at $573M, with interest expense of only $19M. Given that a sizeable portion of the company's debt is on this cheap revolver (35%) and on low interest senior notes not due until 2020 ($150M, 2.72% notes) and 2023 ($350M, 3.29% senior notes), there is little chance of tripping this particular covenant outside of a catastrophe which doesn't appear to be in the cards. The company could actually generate a fairly sizeable net income loss and not trip this covenant due to the windfall of what should be more than $200M+ in annual depreciation and amortization.
Debt to capitalization came in at 0.25, and the company would have to manage to erode $1.7B worth of shareholder equity in order to trip this covenant. Even writing off the $587M in goodwill on the balance sheet completely, along with a 25% cut to the value of its property, plants, and equipment would not be enough to drive triggering this covenant. Like interest coverage, this appears to be a moot point given what should be a competitive, but still healthy, domestic barge market going forward. Despite what is going to be a challenging next few years for the company, there is little risk of triggering a liquidity event.
In my opinion, for all intents and purposes, the company is in excellent financial shape. It is highly unlikely that the company would get itself into a cash flow problem, even with a sharp downturn in its market operations. With that said, when even company management sets such wide earnings guidance for the next fiscal year, it is hard to take a position in a company such as this one built on models and forecasts. As a whole, Kirby Corporation might be worth taking a look at again in several years once the shipping markets are not quite as roiled, and investors that still hold the company currently need to tread carefully in my opinion.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.