A summary of what is happening: the capital raise will result in dilution of shareholders' ownership, hence the ~15% drop in share price, coincidentally also roughly the same magnitude of the resultant dilution.
Management says that "The Company plans to use the net proceeds of the offering for capital expenditures, including vessel acquisitions, and for other general corporate purposes, which may include repayments of indebtedness."
Concerns about this move:
- The market for chartered vessels is already in very bad shape. Companies in this space are experiencing challenging business prospects due to the oversupply and lackluster demand for chartered vessels. As the management has mentioned, it will be using some of the proceeds to acquire second-hand or new build vessels. [billgatesisevilus has contacted Costamare's investor relations and reported through the comments in an SA article that Costamare will be acquiring younger second-hand vessels to replace its older vessels. This has not been explicitly stated in any of its fillings, to the best of my knowledge, so I'll just state out there is a possibility that newbuilds may be acquired]. Should a significant number of new builds be ordered, this can further depress the current charter rates, resulting in a material adverse impact on Costamare's revenue.
- This is slightly speculative but judging by the way the report is written, management may be prioritising vessel acquisitions over repayments of indebtedness. Should this be the case, reduced revenues as explained in point 1 may result in lesser operating cash flows of which a portion would be used to repay indebtedness. This may deteriorate Costamare's credit rating, possibly resulting in a decrease in creditors' willingness to grant additional credit (should there be a need) to the company.
Why I like this move:
Of all the major players in the industry, such as SSW, DCIX, DAC, NMM, GSL and Rickmers (OTC:RCKMY), Costamare is one of the few companies in the space that doesn't need a capital given its relative situation.
Below is a table showing the historic cash flows of the companies in this industry over the past 5 years: (However, I must apologize that a few figures are shown as zero as the software I'm using to do the automatic calculation has encountered a bug.)
As you can see, only Costamare and Danaos have been able to generate positive free cash flow during this challenging period in the vessel chartering industry. Judging by the trend throughout the last 3 quarters, Costamare should be able to achieve a free cash flow of $200 million for the year ended 2016. Hence, it seems, at the very least, that Costamare has a considerable amount of 'leeway' to manage its way through the tough times.
Let us also take a look at debt. Below is a table showing the debt-to-equity ratio of the same companies as shown earlier:
(Source: Daniel Fok, Data: GuruFocus)
The largest companies - CMRE, DAC and SSW - have shown remarkable progress in managing their debt as seen by their debt-to-equity ratios. SSW lowered it by about 20%, DAC) by 62.6% and CMRE by a staggering 66.6%. [calculated by % change = 1- (latest D/E / highest D/E)].
DAC and CMRE have shown the most progress but by a magnitude standpoint, Costamare seems to need this capital raise the least, relatively of course.
What Does This Tell Me?
Costamare is trying to starve its competition. Despite the current harsh conditions, Costamare continues to make money. Below is a table of net income of the same companies as shown earlier:
(Source: Daniel Fok, Data: GuruFocus)
Hence, as seen from its relatively low debt/equity ratio, consistent positive free cash flow, ability to achieve positive net income, Costamare and Danaos seem to be the stronger players at the moment.
Why I think this is a genius move by the management:
Like I said earlier, Costamare may not necessarily need this capital raise. To me, this looks like a move to shore up its balance sheet in order to go on a shopping spree or bottom fishing for cheap box ships, some of which have come from distressed companies like RCKMY that recently sold its 7-year old vessel [what a record!]
To me, this is a sign of prudence and contrarian mindset by the management, which I like very much. Shareholders may get diluted but let's not forget that the founding family will take approximately 1.66 million shares of the 12 million offered. Hence, they are suffering with shareholders as well. The founding family also agreed to fully participate in the DRIP, which tells me that they are serious about the long-term survival and thriving of the company.
With the addition of second-hand vessels and new builds to Costamare's fleet, the company may further depress charter rates, which will hurt its competitors even more. Meanwhile, for Costamare, it can still take the hits as seen by its operating profit margins below:
(Source: Daniel Fok, Data: GuruFocus)
From the above table, we can see that Costamare and Danaos will be able to take on the most hits based on their operating margins.
Alternatively, if no newbuilds are to be acquired, having a younger fleet on average will allow Costamare to have a more efficient fleet on average and to command a higher charter rate, thus fattening up its already fat operating margins.
We must not forget about the risks involved in this move. For all we know, Costamare might shoot itself in the foot since lackluster demand growth may not keep up with the increased expansion of the supply. The company may not be able to successfully charter its new vessels out to its existing customer base and may have to go for riskier liners which may not be as credit worthy as its current customer base. (Costamare has never experienced any incident of customer defaulting on its charter obligations) [This has been stated regularly in its annual reports]. The company may have to then either sell its vessels at a loss or even scrap them, thus wasting the effects of the capital raise.
Due to Costamare's relatively stronger cash, debt and operating efficiency, I believe that the company will be able to come out of the current industry's ordeal strong. The decision made in the future has a high probability of further decreasing the profitability of the industry, should more newbuilds be acquired. However, if the competition will suffer greatly or is forced to declare bankruptcy, I see the move as a genius move, even though profitability of the firm is impacted. In the grand scheme of things and in the ultra-long term, Costamare (and possibly Danaos) may triumph over the competition and establish dominance over the industry when a recovery eventually materializes.
Alternatively, should younger second-hand vessel only be acquired to replace its older vessels, there may be a relief in depressed charter rates, thus improving Costamare's financial performance.
Not only Costamare, but the whole industry, is treading on perilous waters in this long-lasting ordeal. Costamare may very well sink from this decision, or it could triumph in the end of it.
I have confidence that the management, which has shown great skill in maneuvering the company through 2008 by maintaining profitability, will be able to make the right decision or at least react appropriately should a wrong decision be made.
For this, I am bullish on Costamare in the ultra-long term.
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.
Additional disclosure: I am bullish on Costamare as of now but am still going through market research on the industry. I look for wonderful companies run by wonderful management selling at a fair/undervalued price. So far, I believe Costamare fulfills these criteria. I will be posting my research along with my approximate valuations soon. Should I come to the conclusion that Costamare certainly fits these criteria, I will enter a position on Costamare. Stay tuned!