Investment thesis
As of March 10, 2021, Global Ship Lease (NYSE:GSL) owned and chartered 43 mid-sized and smaller containerships, making astronomical profits amid vessels shortage and sky-high charter rates. However, for some unknown reason, analysts underestimate the company's EPS figures for 2Q 2021 (GLS is about to release earnings results on August 5, pre-market). Comparing all the facts, I conclude that the fears of analysts look unfounded and GSL may beat the EPS forecasts; that would push the quotes even higher.
What's wrong with the forecasts?
To give a short answer to this question - I don't know. For reasons unknown to me, analysts have downgraded the company's EPS forecasts for 2Q 2021 from $0.56 to $0.50, that is, by 12%. The last assessment was made on July 31st, that is, a few days ago (from the time of this writing). This is logical because the calendar quarter just ended on this date, so analysts had all the necessary data to revise their forecasts.
The whole situation reminds me of the recent events with Danaos Corporation (DAC). Danaos' EPS forecasts have also been downgraded (even twice) - from $3.39 to $3.05, that is, by 11.15%. But the company reported yesterday and beat both the old and the new forecast:
| DAC | GSL | |
| EPS 2Q 2021 previous estimate | 3.39 | 0.56 |
| EPS 2Q 2021 final estimate | 3.05 | 0.50 |
| Actual EPS | 3.4 | ? |
| EPS Revision for 2Q 2021 | -11.15% | -12.00% |
| # of down revisions for 2Q 2021 | 2 | 1 |
| Actual EPS surprise | 11.48% | ? |
Source: Author's calculations based solely on Seeking Alpha data
The entire industry in the second quarter of 2021 exceeds analysts' expectations. For example, Navios Maritime Partners (NMM), which released its 2Q results on July 27, beat the EPS forecasts by 46.6% and is now trading 3.1% higher. Or, for example, Costamare Inc. (CMRE), which beat street's forecasts for both revenue (2.46%) and EPS (9.30%) figures - now the stock is trading 5.95% higher than before the report.
Something had to happen during the 2Q that could actually force analysts to lower their forecasts. But among all the possible news, there are only two that could, in theory, lead to the revisions:
- Global Ship Lease to acquire four Panamax containerships on multi-year charters.
- Global Ship Lease to acquire 12 containerships for $233.9M.
Both deals will be financed by cash on hand and a combination of debt capital (bank loan, senior secured debt, etc.). The interest on the borrowed debt can reduce the EBIT, and, consequently, the EPS figure. However, I do not think that the company will give the entire amount at once because the earliest ships (4 Panamax containers) are scheduled only for 3Q 2021. Therefore, I believe that the street has rushed to cut the company's EPS forecasts, and the likelihood that GSL may beat them is extremely high.
What we can expect from GSL if it beats the EPS forecast? And why it can?
Well, first of all, in the short term, we can expect the stock to start catching up with its peers:
Source: Seeking Alpha charting
Moreover, considering that the dynamics of the company's EV/EBITDA multiple lags significantly behind DAC and CMRE:
Source: Seeking Alpha charting
Note: NMM's multiple contraction is a different topic. You can find some explanations of it in my most recent article on NMM here.
But how did the stock behave historically after strong (and not) earnings reports? To answer this question, I collected the key (as it seems to me) data from 4Q 2018 to 1Q 2021 and tried to analyze it all:
| Earnings Dates | Release Dates | EPS surprise | 1-day change (after release) | HARPEX change | GSL price return |
| Q1 2021 (Mar 2021) | May 10, 2021 | 40.51% | 0.61% | 34.81% | 17.77% |
| Q4 2020 (Dec 2020) | Mar 04, 2021 | 49.29% | -13.49% | 57.76% | 1.59% |
| Q3 2020 (Sep 2020) | Nov 09, 2020 | 105.13% | 25.65% | 16.18% | 109.42% |
| Q2 2020 (Jun 2020) | Aug 06, 2020 | 137.22% | 3.07% | -26.45% | 51.32% |
| Q1 2020 (Mar 2020) | May 12, 2020 | 44.51% | -3.36% | -5.43% | 9.35% |
| Q4 2019 (Dec 2019) | Mar 05, 2020 | -15.22% | -9.89% | 4.94% | -26.33% |
| Q3 2019 (Sep 2019) | Nov 06, 2019 | 16.22% | -1.79% | 15.24% | -21.93% |
| Q2 2019 (Jun 2019) | Aug 01, 2019 | 5.56% | -6.02% | 15.92% | -7.17% |
| Q1 2019 (Mar 2019) | May 07, 2019 | 15.79% | 3.60% | 1.48% | 33.96% |
| Q4 2018 (Dec 2018) | Mar 05, 2019 | -50.03% | 4.59% | -11.28% | -7.75% |
Source: Author's calculations based on different data sources (links in headers)
Even with the naked eye, it's noticeable that the higher the EPS surprise was, the higher the stock grew until the next release date. This is most clearly seen graphically:
Source: Author's calculations based on RStudio and Excel
In turn, the likelihood that the EPS will beat analysts' forecasts depends on HARPEX - the index that "reflects worldwide price development on the charter market for container ships":
Source: Author's calculations based on RStudio
We already have the factual weighted average values of HARPEX for 2Q 2021: the index has soared 48.84% compared to 1Q 2021 and 267.78% compared to 2Q 2020. As I wrote earlier, analysts expect an EPS of $0.50 for 2Q 2021. But at the same time, for the same period last year, the company showed $0.76. That is, at charter rates that were 2.68x lower than the current ones, the company actually showed 52% more EPS than expected for 2Q 2021. This fact could be justified by a huge dilution, which did not happen. And even if it did, the number of shares should have doubled at least.
That is why I believe that GSL's EPS projection is unfairly low as compared to even last year, so this may indicate a possible mispricing and buying opportunity for the mid-term investors.
The takeaway, "How to act?", and Risks
In the past few days, most container ship companies have beaten analysts' EPS and revenue forecasts. Global Ship Lease, it seems to me, is unlikely to be an exception, especially considering how much the forecast was lowered. Historically, after a beaten EPS forecast, the stock skyrocketed during the next quarter. This time it may repeat itself not only because of the very fact that the EPS was beaten but also for fundamental reasons.
After the last 2 purchases, which I mentioned above, the company's fleet will expand to 66 ships (that is, by 53.5% compared to the previous quarter). Since the end of the second quarter (from June 25), the weighted average HARPEX amounts to 2,913.97, which is already 58.59% more than in 2Q 2021. The company expected the new ships to increase the EPS over the next 12 months after arriving in the fleet by $1.97 ($0.88 + $1.09), but there's a possibility that these figures may be underestimated:
GSL guided for at least $1.09 in annualized EPS contribution from this latest purchase. However, with containership rates continuing to surge, I suspect GSL guided too low on the first deal and I would anticipate a minimum of $1.50 in annualized earnings contribution from those ships once they are fully delivered by the end of Q3 2021.
Source: From "Global Ship Lease: Racking Up Container Profits (Podcast Transcript)"
HARPEX has already broken the 3300 mark and, apparently, is not going to stop anytime soon:
Source: HARPER PETERSEN
In the next 2 quarters of this year, EBITDA is likely to grow at an astronomical rate (while HARPEX is above 2500-3000), which will allow it to maintain and even increase its declared dividend yield of >6%. Therefore, as in my previous article about Big 5, here I see 2 possible paths to go LONG:
- Buy now, don't wait. This is how I will do it myself. This way, I will be able to participate in the stock rally, which, as I have already proved above, is highly likely to occur if events develop as we expect.
- Wait for the 2Q release. After the actual numbers, it'll become clear whether I was right or not. Then you can think again. However, I believe that buying after the report still makes sense, given how much GSL might earn in 3Q and 4Q amid such rapidly growing rates.
With the help of the second scenario, you partially minimize your risks, but you also lose a significant share of the probable return. However, in both cases, the risk-return will be on the side of investors due to unreasonably low expectations initially. However, it is worth keeping in mind the obvious risks:
- I'm going against the market. As with my bullish thesis on Big 5, this kind of risk is obvious. However, in this particular case, this risk is slightly less, because GSL's short interest is only 1.10%. But still, it's important to remember this before buying - adjust your LONG position accordingly.
- I might be missing something important. Yes, it's not entirely clear from the company's news over the past few months what it could be, but this risk is also important to consider.
- The speculative risk with all its consequences. By and large, my analysis cannot be called fundamental, despite all the work done. My findings will make sense for a fairly short period of time - from a month to the end of 2021. However, this can be used by long-term investors as an excuse to slightly increase their portfolio return.
Considering all the risks, I suggest that medium-term investors pay attention to Global Ship Lease and its upcoming 2Q report and act following the plan described above.
