1. Motivation
This note presents a method for predicting the quarterly revenues of Freeseas Inc. (FREE, FREED) prior to earnings release. This method is shown to be unbiased (i.e. no systematic overestimation or underestimation of revenues), and accurate to with +/- 5% of FREE’s actually quarterly revenues. It is the hope that readers will be able to apply this method to other shipping companies, and ultimately estimate other aspects of a shipping company’s balance sheet (e.g. quarterly free cash flow, earnings per share, etc.).
2. Method
The following steps are based on actual numbers from FREE’s 4^{th} quarter of 2009.
Step 1. Create a new spreadsheet and add all ships and their charter rates in units of dollars per day. FREE’s current charter rates are found on their webpage and their subsequent updated charter rates are provided via press releases. The first set of rates were the charter rates as of 9/1/2009.
09/01/09 | |
Destiny | 10000 |
Envoy | 7900 |
Goddess | 12500 |
Hero | 14500 |
Impala | 8750 |
Jupiter | 25216 |
Knight | 8300 |
Lady | 51150 |
Maverick | 9500 |
Neptune | 15000 |
Step 2. Every time FREE updates its charter rates, update the spreadsheet accordingly. Be sure to note the date of the press release at the top of the column. For example, during Q4 2009, FREE updated its charter rates two other times during the quarter – 11/19/2009 and 12/15/2009.
09/01/09 | 11/19/09 | 12/15/09 | |
Destiny | 10000 | 9075 | 14000 |
Envoy | 7900 | 7200 | 7200 |
Goddess | 12500 | 12500 | 12500 |
Hero | 14500 | 11500 | 11500 |
Impala | 8750 | 11500 | 13500 |
Jupiter | 25216 | 25216 | 25216 |
Knight | 8300 | 7000 | 15000 |
Lady | 51150 | 51150 | 51150 |
Maverick | 9500 | 10000 | 14000 |
Neptune | 15000 | 20000 | 16000 |
Step 3. Calculate the number of days between charter changes, and make sure the total number of days sum to the total number of days in the quarter. For example, in Q4 2009:
# days 9/1 – 11/18 | # days 11/19 – 12/15 | # days 12/16 – 12/31 | total |
49 | 27 | 16 | 92 |
Step 4. Multiply the number of days by the appropriate charter rate and sum over all ships. For example, in Q4 2009:
| cummulative revenues | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Step 5. Sum all of the cumulative revenue values:
| 16 | 224000 |
Step 6. In order to calculate the total revenues, we need to multiply the total from step 5 by the utilization rate. The utilization rate is essentially the percentage of time that FREE’s ships were actually earning revenues (i.e. transporting goods). I assumed an utilization rate of 0.94, which was pulled from the previous quarter’s earnings report. The estimated quarterly revenues then become: 0.94 x 15.32 = 14.25 million.
This is a simple method for estimating FREE’s quarterly revenues.
Verification
I applied this method to Q409, Q110, and Q210. The table below highlights my performance.
forecast | actual | % off | |
Q4 2009 | 14.2456 | 14.5 | -1.8 |
Q1 2010 | 15.1076 | 15.66 | -3.5 |
Q2 2010 | 16.9608 | 16.5 | 2.8 |
Conclusion
This method can be used to estimate a shipping company’s revenues prior to an earnings release. The drybulk company, Freeseas, was used as an example since it operates in the spot market and updates its charter rates often. It should be noted that sometimes charter terms include a ballast bonus. These are one-time fees earned that must also be added to the quarterly revenue estimate. Future comments will provide methods for analyzing other aspects of Freeseas balance sheet.
Disclosure: long FREE