Thursday, January 08, 2009
The Shipping News: BUY
Thursday, 08 January 2009
The overall market in 2008 was a complete washout, as was oil and the commodities complex. But not all was bad; there were positive segments, the U.S. dollar and treasuries just to name two. The chart below sums up the year’s performance in each of these areas rather eloquently. It’s our opinion, however, that real value will not be found in any of these areas in 2009. Sure, we expect the general equities market to appreciate – even to rise with some ferocity. Yet within that realm there’s a smaller sub-sector that should see some fantastic gains. It’s a segment that’s been beaten down mercilessly, literally held underwater, all the life-giving, oxygenating money literally wrung out of it. And in keeping with the adage that the last shall be first, we believe this segment has glorious days ahead.
2009: The triumph of the weak over the strong.
By now everyone is familiar with the chart of the Baltic Dry Freight Index, a number issued daily by the offices of the Baltic Exchange in London that measures the price of moving commodities by sea. Records on the BDI go back some 250 years and have been important to market watchers and economists ever since as a means of measuring the general health of global trade. When the index is high, it means demand for cargo ships is running at greater than average levels (with lots of demand for raw materials); and when it’s low, little demand for materials is in the pipeline.
This year’s BDI chart epitomizes what happened to world markets in 2008, and, as poster child for a worldwide economic recession, describes what we all experienced better than any 1000 words on the topic ever could.
The chart depicts a plunge unlike we’ve ever seen, and tells a tale of woe, woe, woe on the water. Essentially, contracts for bulk shipping evaporated, leaving the oceans filled with nothing but - pirates!
But things have been changing as of late, and though it’s hard to know if they’re on a long term trend upward, we can’t imagine things getting a whole lot worse for these folks. The BDI, after all, cannot go bankrupt.
A Closer Look at the Shipping Business
There are a number of global shippers worth examining, and even a quick search of the sub-sector on a stock screener/filter reveals tremendous value. Here are a few names to consider:
Note that this is just a random selection of shipping companies with screen inputs of:
• P/E less than 10
• Dividend Yield greater than 10
• Yearly loss greater than 30%, and
• Trading below Book Value
It doesn’t claim to be a “buy list.” It’s offered merely to point out that by all the standard metrics of value these stocks are extremely attractive.
Looked at through a more discerning lens, however, one company stands out.
Excel’s fleet of 47 ships carries iron ore, coal, grain and steel products (among others) to worldwide destinations, and the company has grown sales every year from 2002 ($16 million) through last year (2007 – $141 million).
Excel has a relatively small market cap, which makes it conducive to a punchy jump once the market starts heating up. Recent activity on the stock reveals that may already be happening.
Add to this that as late as November of this year, with the company literally underwater, the Board of Directors signed off on payment of the quarterly $.40 dividend. There was no wavering or reluctancy: Excel duly paid its shareholders. If there ever was a sign of management confidence in its stock, that’s it. The size of the dividend is equally appealing: a whopping 20.15%!
A technically solid picture here, with the 49 DMA about to be traversed on better than average volume – and a good deal of accumulation in the last thirty days.
Much of the blame for the drop in the major shippers has to do with the fall of Lehman Brothers and those they did business with in Letter of Credit financing – a uniquely important tool in the shipping business. Now that liquidity is returning to the credit markets and the crunch is easing, we expect to see others rush in to fill the void occasioned by the loss of Lehman.
If you needed anything else to push you overboard, here it is: the company sells at a
measly 3x forward Price/Earnings. 2009 is expected to bring $2.70 per share. Current price of the stock is $7.94.
Another Option
For those who live in fear of selecting individual stocks for purchase, you’re in luck. Claymore Funds offers SEA:NYSE, the shipping ETF. Begun just this year in the midst of the BDI’s extraordinary fall from grace, the SEA fund is chartered to correspond as closely as possible to the Delta Global Shipping Index, with “at least 90% of its total assets in common stock, American depositary receipts (“ADRs”) and global depositary receipts (“GDRs”) that comprise [that] Index.”
The fund paid a total of $.442 over the half year, for an extrapolated current yield of roughly 8%. Not bad for letting someone else do the picking for you.
As adapted from Oxbury Publishing
1 comments:
It is interesting to see that finally someone tries to identify the reason for the dry up of international trade finance. I am however not convinced that Lehman Brothers was the reason. The letter of credit business is mass market but highly specialized. You need many document examiners who need experience whether a FIATA Bill of lading presented under an LC complies with the requirement of a maritime bill of lading.
In case you have any questions regarding letters of credit, please visit the Letter of Credit Forum which hosts several articles on international trade finance, sample documents, and a blog. Of course you can ask questions in the forum which is frequented by many experts in international trade.
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