New Wave for Shipping Industry?

July 27, 2010

The shipping industry appears to be emerging from one of the most difficult storms in decades…

Three years ago, capacity was expanding exponentially while day rates for dry bulk and container ships rose to clearly unsustainable levels.  Shipping stocks realized triple digit returns several times over while IPO and secondary offerings were snapped up by buyers at nearly any price.

Of course the tide swiftly changed during the recession, and investor attention turned from how to capture the rise in day rates, to whether or not to simply scrap ships for the value of the steel.  (of course the value of the steel plummeted too so there were no easy solutions).

The stock price for most of the shipping companies have declined to levels that are not only low compared to earnings, but are also well below book value.  For many of these firms, book value is still a questionable term because many of the vessels are being carried on the books at an inflated purchase price less only a couple years of depreciation.  Still, there are a number of stocks in the industry that appear to be exceptionally cheap – especially given the pricing and demand dynamics which are beginning to revive.

Demand Meets Reduced Supply

In addition to taking ships off the market during the economic crisis, many shipping companies have also decided to operate their fleet at fuel efficient speeds which further decreases the available capacity.  During strong economic times, it made more sense to get containers moved quickly and charge a higher day rate to account for the fuel costs.  But cost cutting measures are now in question as demand picks up.

Fighting for freight, retailers are outbidding each other to score scarce cargo space on ships, paying two to three times last year’s freight rates – in some cases, the highest rates in five years.  And  still, many are getting merchandise weeks late.  ~Retailers Pay More to Get Cargo – NYT

The article goes on to say that companies with existing contracts with shipping firms are more likely to secure shipping capacity which is a major problem for smaller-niche retailers.  With the expectation for an improving economy and the necessary inventory restocking, container ship capacity could be an issue for a number of quarters – if not years.
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Demand for Dry Bulk capacity is also increasing as emerging economies like China are once again importing coal, iron ore, re-bar and other industrial goods.  From the US, to Russia, to India, to China – it appears that demand is supporting shipping pricing.

This transition has only recently begun to be reflected in the stock prices of major shipping companies.  With investors more willing to buy into the bullish case, a few shippers are beginning to look interesting and are approaching the top of my watch list.

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Potential Shipping Trades

Over the past week, Genco Shipping & Trading Ltd. (GNK) has completed a major financing transaction and also took delivery of a Handysize vessel.

The company was able to raise $160 million by offering $3.1 million shares of common stock at $16.00 plus an additional $110 million of convertible senior notes (Reuters).  The capital was then used to take delivery of the Genco Ocean – a 35,000 dwt Handysize newbuilding.

It’s encouraging to see the liquidity in the market allowing for this transaction – and the delivery is actually the first of five vessels under contract.  The Genco Ocean will immediately be put into service under a 35 to 37 month time charter which helps add visibility into GNK’s future earnings and cash flows.

The stock has remained above the price of the secondary offering, indicating strong investor demand and appears to have put in at least a temporary bottom at $14.20.

Diana Shipping Inc. (DSX) is also in the process of adding additional vessels to its fleet.  With a manageable debt load and expectations for an increase in earnings this year, fundamental analysts can make a decent case for owning the stock.

According to the company’s fleet employment sheet, the majority of the vessels are on charters which expire mid to late 2011 or in 2012.  So for the next few quarters, earnings should be fairly predictable, but if pricing remains robust, DSX could begin to see an increase in revenue and earnings as new agreements are inked at higher day rates.

Just for kicks, check out Diana’s Fleet Position Map which tracks the global position of each vessel…

Other shippers worth keeping on the watch list include Teekay Corp (TK), Frontline Ltd. (FRO) and Seaspan Corporation (SSW)

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