What’s Next for the Bulk Shippers?
September 12, 2008 @ 11:00 am In Commodities, Energy, Equities, Industrials, Materials | 6 Comments
Investors
seeking wild volatility in recent months have been big fans of the dry
bulk shipping sub-sector. The interest in these companies has exploded
over the last year because of their unique relationship with
commodities, the energy sector, and the materials sector. In most cases
over the short and intermediate term commodity spot prices do not
affect the supply and demand for these dry bulk shippers’
services. Instead, they are affected heavily by the Baltic Dry Index
(BDI). You can find a summary, chart, and the level of the index [1] here.
Daily Chart For Cape/Panamax/Handy
4 TC AVERAGE Values
As you can see from the chart, it hasn’t been pretty for the dry
bulk shippers as the index has come down from about $230,000 to
$80,000, a drop of 65%, in one quarter. This index tracks the averages
of smaller indexes that base shipping rates on the size of the vessel.
The index is wildly volatile, especially over the course of the last
two years. I would expect this level of volatility to continue into the
foreseeable future until more companies begin to use hedging
derivatives to lock in revenue streams. This is already becoming more
prevalent in the industry but many of the contracts are still based off
spot market pricing.
The overriding factor over the long run for the dry bulk shippers is
growth. Many analysts believe that world GDP growth and developing
world GDP growth will guide the long term direction of the dry bulk
shippers’ stock prices. Brazil, Russia, India, and China cannot grow
without raw materials and at least two if not three of the BRIC
countries will be net importers of commodities going into the future.
Even regions with large amounts of commodities will still have to
export their commodities to other countries. As you can see, without
the dry bulk shippers the world simply cannot move forward. At these
levels, almost all of the dry bulk shippers are attractive investing
ideas but two in particular come to mind.
Dryships
Dryships [[2] DRYS: 21.7601, +2.2601 (+11.59%)]
is an interesting play because it is no longer a pure-play bulk
shipper. Dryships recently acquired Ocean Rig and has entered into the
ultra deep water drilling market. This separates them from the rest of
the competition, and in theory this acquisition should actually make
the stock less volatile. In most cases dry bulk shipping companies will
hedge a much smaller percentage of their revenue than drilling
companies. This component should be able to tame the rapid movements of
Dryships after the integration is complete. The long term fundamental
outlook for the deep water drilling industry looks strong, especially
since the Brazilians and Petrobras [[3] PBR: 27.83, +2.28 (+8.92%)]
have not be able to contract enough drill ships to fully exploit their
deep water reserves. This transition will not be easy, the deepwater
industry is controlled by the big three; Transocean [[4] RIG: 73.052, +2.422 (+3.43%)], Noble Corp. [[5] NE: 30.59, +2.82 (+10.15%)], and Diamond Offshore [[6] DO: 73.47, +1.89 (+2.64%)].
Genco
Genco [[7] GNK: 20.78, +1.12 (+5.70%)]
is another of my favorite bulk shippers and possibly the best run
shipping company in the industry. Their Director and Chairman of the
Board, Peter C. Georgiopoulos, is one of the most respected figures in
the international shipping industry. He is also the CEO of General
Maratime Corp. [[8] GMR: 13.18, +0.93 (+7.59%)] and Aegean Marine Petroleum Network, Inc. [[9] ANW: 13.07, +1.07 (+8.92%)],
other successful shipping companies. Georgiopoulos had the foresight to
begin buying up tankers during the bottom of the shipping market in the
early 2000s. This foresight led to massive investor returns since the
initial public offering in the middle of 2005. The stock is up almost
150%, and that does not include the massive dividend that Genco
provides. Genco’s dividend of almost 10% is well above industry
average. Genco had earnings surprises of 15.2%, 13.7%, 10.0%, and 15.3%
for the last four quarters. These numbers only further support the
solid management that has brought such high levels of performance
during these volatile times. The excellence in financial management has
also provided investor with the safety of the dividend over the long
term. I would bet highly against any form of a dividend cut especially
since the stock can go back to $80.00 a share just as fast as it has
dropped from those levels.
Conclusion
The attractive valuations has made it very hard to ignore the bulk
shippers. Even though they are volatile, in most cases their dividends
are extremely safe. In a worst case scenario where there is no equity
appreciation, (I find this extremely unlikely) these stocks will still
provide a nice stream of income for any investor that can stomach the
risks. Since most of these companies operate internationally, investors
shouldn’t be overly worried about either Barack Obama or John McCain.
Since many investors are unfamiliar with these stocks, I have compiled
a list of some of the more interesting equities.
- Dryships Inc. [[2] DRYS: 21.7601, +2.2601 (+11.59%)]
- Genco Shipping [[7] GNK: 20.78, +1.12 (+5.70%)]
- General Maratime Corp. [[8] GMR: 13.18, +0.93 (+7.59%)]
- Aegean Marine Petroleum Network, Inc. [[9] ANW: 13.07, +1.07 (+8.92%)]
- Diana Shipping Inc. [[10] DSX: 15.77, +0.99 (+6.70%)]
- Excel Maritime Carriers, Ltd. [[11] EXM: 12.9581, +1.7081 (+15.18%)]
- Eagle Bulk Shipping Inc. [[12] EGLE: 9.92, +1.11 (+12.60%)]
- Tsakos Energy Navigation, Ltd. [[13] TNP: 25.41, +1.85 (+7.85%)]
- Nordic American Tanker Shipping, Ltd. [[14] NAT: 29.25, +1.32 (+4.73%)]
- Teekay Corp. [[15] TK: 21.12, +1.47 (+7.48%)]
Disclosure: The author is long NE, the authors family is long NE
and PBR, the mutual fund the author manages is long NE, and the author
plans to be long DRYS and GNK in the near future.
http://www.bullishbankers.com/whats-next-for-the-bulk-shippers/
Charles W. Petredis
About the Author:
Q1 -- What about TBSI? They have fantastic upper and bottom line growth...
TBSI has had an impressive growth story going for it but I left it out
because its small size makes it more risky than it’s peer group.
Fundamentally they are very sound and I believe they will do well in
the next up cycle.
Q2 -- Do you think it’s a good long-term plan for them to kick out so much of
their cash back to shareholders? One smaller cap shipper that wasn’t on
your list, Star Bulk Carriers Corp. (SBLK), has a dividend yield of
15.70% — one of the largest I’ve seen. Diana Shipping Inc. (DSX) on
your list had an EPS of $1.75 per share last year and a current
dividend of $3.64 per share of common stock. It’s never a good signal
to cut dividends, but how do these high dividend rates compromise their
future growth/financial stability?
I can’t speak to all of the companies in extreme depth but in general
dividends are more premium than capital appreciation. A good example is
that the S&P 500 without dividends is probably going to return
negative for the period of 2000-2009. The real key is as long as the
business model is sustainable then I wouldn’t worry about the
dividends. Remember those earnings estimates are on the bottom line and
they already account for the massive CAPEX increases that these
companies have undertaken this year because of all the new tanker
builds. The industry won’t sustain tanker new builds at this rate over
the long run and EPS growth will partially come from a decrease in the
CAPEX growth rate. On top of that these equities are extremely
depressed right now and these yields won’t be around for long.
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发表于 2008-10-17 07:55 PM
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