Container Shipping Companies Awakening from ‘Night-Maersk’ Quarter

The recent news from the granddaddy of all shippers, Denmark’s AP Moller-Maersk, was not good — and investors in all the smaller container shipping companies were broadsided by it.

In early May, Maersk reported heavy first quarter losses, which “exacerbated fears about the industry’s future,” according to international shipping writer Robert Wright of the Financial Times. Many of the small cap container shipping companies, which had been moving higher with the market in the early months of 2012, saw investors flee on the news.

Photo courtesy of shipsofthemersey.me.uk

We last looked at small cap container shipping companies back in mid-January when a story on the growth in container handling in Los Angeles prompted hopes that it was an indicator of recovery, at least in the short term.  Let’s look at how these companies compare now, as opposed to four months ago, and see if they have come back after the Maersk report.

Honolulu-based Alexander & Baldwin Inc (NYSE: ALEX; http://www.alexanderbaldwin.com/) is one of the larger US-based container shippers with 10 containerships in its Matson Line.  ALEX containerships ply the waters between Asia, the Pacific Islands (Hawaii in particular) and the US west coast.   Back then,  ALEX had a market cap of $1.9 billion, stock price of about $44.89, and trading volume of more than 230,000 shares per day.  Indeed, ALEX took a hit on the Maersk news, dropping down from about $52 to $48, but it has rebounded. It closed May 30 at $50.62, down 78 cents on the day and now has a market cap of more than $2.1 billion.

Athens-based Box Ships Inc* (NYSE: TEU: http://www.box-ships.com/) operates a fleet of seven containerships whose average age is only about four years, with two more vessels on order.  TEU has a policy to pay substantially all of its operating cash flow out in dividends, minus the amounts required to maintain its operations, fleet and planned growth.  In mid-January its stock price was about $8.40 and a market cap of about $132 million and average daily trading volume around 112,000 shares. It ran up to more than $9 until the Maersk report tanked the stock, sending it all the way down to about $7. At the close of market May 30, the stock price was back to $8, up 16 cents on the day, and its market cap is now about $130 million. Average volume is about 62,000 shares a day.

Athens-based Diana Containerships (Nasdaq: DCIX; http://www.dcontainerships.com/), with a total of nine vessels, is a sister of a drybulk carrier Diana Shipping. Back in January, its market cap was about $164 million, with trading volume of 128,000 shares per day, and a stock price of $7.10.  At the close of market May 30,  DCIX was trading at $7.10, down 4 cents on the day with a market cap still at $164 million. Trading volume is much higher, about 211,000 shares a day. 

Athens-based Costamare Inc (NYSE: CMRE; http://www.costamare.com/) has a fleet of 59 containerships charted to shipping lines. Back in mid-January its market cap was about $900 million and stock price was about $15.   At the close of market May 30, CMRE was trading at $13.41, down 27 cents on the day. Current market cap is about $909 million.

Piraeus-based Danaos Corporation (NYSE: DAC; http://www.danaos.com/), also has a large fleet of 57 containerships, with 8 more on order. Back in mid-January, its market cap was $363 million and it was trading at $3.33 on volume of about 32,000 shares per day. As of the close of the market May 30, DAC was trading for $4.03, up 1 cent on the day. Market cap is now about $442 million.

*Denotes a client of Allen & Caron, the publisher of this blog (though we do not trade their shares)

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Container Shipping Reaches New High in Port of Los Angeles — A Trend?

The road to economic recovery is long for the US and other countries that have experienced negative growth or dismally small growth rates over the last several years.  It seems that a variety of indicators are moving up more robustly than they did last year: job creation, housing contracts, retail sales, auto sales, manufacturing output.  Now the Port of Los Angeles has announced that 2011 was the first year ever that the busy seaport exported more than 2 million containers of cargo — hitting 2.1 million containers.  For the CNBC take on this, try this video link featuring Maria Bartiromo and Jane Wells: http://video.cnbc.com/gallery/?video=3000068154.  

Box Trader -- a container ship, courtesy of Box Ships Inc

The marine shipping industry around the world was hit hard by the credit crunch and subsequent slowdown in demand for shipping, but the growth in container handling in Los Angeles may be an indicator that at least the container shipping industry is a place to look for current value and recovery in the short term.  Keep in mind that when looking at shipping companies it is important to keep an eye on the balance sheet, because some shippers overcommitted to capital expenditures (new vessels) during the boom years, and have been stuck with heavy debt loads as a result.

At the same time one of the giants of the shipping industry, Maersk, has ordered 10 huge new container ships that will dwarf container ships of the past: http://nextbigfuture.com/2011/02/largest-container-ship-will-be-16.html.  This blog does not follow big companies like Maersk, but there are several smaller container-ship companies that may merit the attention of investors.

First, a hybrid company: Honolulu-based Alexander & Baldwin Inc (NYSE: ALEX; http://www.alexanderbaldwin.com/).  Although it is larger than most companies we write about, much of its revenue comes from gigantic land-holdings and agricultural interests.  But it is one of the larger US-based container shippers as well, with 10 containerships in its Matson Line, which some Americans remember as the line that used to carry passengers from California to Hawaii on the white steamships, Matsonia and Lurline in times of yore.  ALEX containerships ply the waters between Asia, the Pacific Islands (Hawaii in particular) and the US west coast.   With sales of about $1.7 billion, low debt to equity, and rising earnings, ALEX may be a comfortable company for conservative investors, with its market cap of $1.9 billion, stock price of about $44.89, and trading volume of more than 230,000 shares per day.  What’s more, ALEX plans to split to 2 companies, yielding a pure-play marine transport company with the Pacific as a playground: http://www.businessweek.com/ap/financialnews/D9RC234O0.htm.

Many economists would tell us that the second leg of a bull market (if that is indeed where we are today) is likely to make smaller companies more buoyant as to valuation, so some of the smaller containership companies are also worth having a look at.

Athens-based Box Ships Inc* (NYSE: TEU: http://www.box-ships.com/) is considerably smaller overall than ALEX, but its fleet of containerships stands at 7 vs ALEX’s 10, and TEU has 2 more vessels on order.  TEU has only been publicly traded for less than a year, and has been paying a dividend of $0.30 per quarter — its policy is to pay substantially all of its operating cash flow out in dividends, minus the amounts required to maintain its operations, fleet and planned growth.  The current stock price is about $8.39, which would make the yield about 11.9% on an annualized dividend of $1.00.  With a debt to equity ratio lower than many shippers and a fleet whose average age is only about 4 years, it may be worth evaluating.  Several analysts follow the company.  Market cap is about $132 million and average daily trading volume is around 112,000 shares.

Athens-based Diana Containerships (Nasdaq: DCIX; http://www.dcontainerships.com/) is a sister of a drybulk carrier, Diana Shipping, and its market cap is in the same general range as TEU: $164 million, with trading volume of 128,000 shares per day, and a stock price of $7.10.  Its dividend of $0.60 in 2011 gives a yield of about 9%.  DCIX announced last week that it has acquired 2 additional vessels for a total of 9, so its fleet is a bit larger than that of TEU and only a tiny bit smaller than that of ALEX. 

Also Athens-based is Costamare Inc (NYSE: CMRE; http://www.costamare.com/) , with a market cap of $900 million and a current stock price of about $14.97.  Its $1.08 dividend from last year gives a current yield of about 7%, and the company recently declared a quarterly dividend of $0.27 payable in February.  Costamare’s fleet consists of 59 containerships chartered to shipping lines, and its long-term debt is fairly substantial when contrasted with its shareholders equity.  It was somewhat less profitable in 2011 than in 2010,  but with a good bottom line.  Caveat emptor.

Piraeus-based Danaos Corporation (NYSE: DAC; http://www.danaos.com/), also has a large fleet of 57 containerships, with 8 more on order, and its relatively low market cap of $363 million (when compared to Costamare with a fleet of similar size) is most likely due to its rather heavy debt load compared to its equity, and its somewhat spotty bottom line — though to be fair, GAAP earnings in the shipping industry may at times not be the only way to judge a company.  DAC is trading at $3.33 on volume of about 32,000 shares per day, which also speaks to a certain reticence on the part of buyers.  Higher risk sometimes means higher gains in the long run — but obviously not every time.

There are numerous other companies in the containership business, and this article does not pretend to be a complete survey of the field.  Please do your own research; we do not make recommendations as to investments — we just write about companies we find interesting.  Box Ships (TEU) is a client of Allen & Caron, the publisher of this blog, though we do not trade their shares.

Defense & Homeland Security Stocks: Some Are Going Up, Up, Up

As world economies edge toward recovery while job creation remains on the sidelines in many places, one of the industry sectors that may be attracting more attention is defense and homeland security.  In a consumer-driven recovery with strong job creation, the focus may be different, but at this point the companies that stand to do business with sovereign governments are looking increasingly intriguing.  Many of those companies are multinational giants, of course, and many are controversial for one reason or another.  But there are good smallcaps too, and we’ll have a look at some of them in this article. 

As a backdrop at a time when the US is waging two hot wars, it may surprise many people to know that as a percentage of GDP, defense spending, though not at an alltime low, is far from a historic high.  Ira Machevsky provided a concise analysis and chart about 18 months ago to show graphically what that means: http://thenumbersguru.blogspot.com/2008/10/defense-spending-as-percent-of-gdp-1940.html, and the conservative think-tank, The Heritage Foundation, seems to concur: http://www.heritage.org/budgetchartbook/Defense-Spending-on-the-Decline-Despite-War-on-Terror.aspx.

Heritage Foundation Chart on Defense Spending as a Percentage of GDP

For an investor interested in the defense and homeland security sectors, the SPADE Defense Index could be helpful: http://www.spadeindex.com/components.php.  It is a capitalization-weighted index of 50 stocks in the space, but tends to be heavy on the bigger companies.  It is listed on NYSEArca as DXS. 

We never recommend stocks; we just write about interesting companies.  Please do your own diligence. 

But in terms of world hot-spots, the geographic band that runs between, say, Tripoli and Bali (not precisely, but you get the picture) is an area that is dealing with defense against insurrection and terrorism, as well as regional, ethnic and/or religious clashes that are the continuance of many decades or even centuries of conflict in some cases.  This creates a situation where defense and defense intelligence is increasingly important.  Have a look at Covington KY-based Valley Forge Composite Technologies (OTCBB: VLYF, http://www.vfct.com/).

VLYF announced on Friday that their THOR LVX imaging systems have been listed by the government of Malaysia to be used in scanning shipping containers for such contraband as explosives, narcotics and radioactive materials (http://finance.yahoo.com/news/Valley-Forge-Composite-prnews-1400008836.html?x=0&.v=1).  Considering that shipping containers worldwide are seldom checked for anything at all in spite of their super-abundance, investors may conclude that the VLYF technology has a potentially lucrative outlook.  That seemed to be the case on Friday, when the stock moved up 10% to $2.62, vs a year-low of $0.10 (there should be some corks popping somewhere) on very strong volume of more than 400,000 shares.  Market cap is about $143 million.

Also uptrending strongly is Cleveland OH-based Hawk Corp (Amex:HWK; http://www.hawkcorp.com/), which makes “friction” products (like brakes) for aircraft and various types of land vehicles, including military and heavy construction, as well as some fuel-cell components.  HWK shares closed Friday at $19.39, vs a year range of $9.31 – $20.27, for a current market cap of about $160 million on slightly puny trading of about 23,000 shares.

Or look at Edgewood NY-based CPI Aerostructures (Amex: CVU; http://www.cpiaero.com/), which makes a wide range of aircraft parts and subassemblies for the US Air Force and other part of the US military.  CVU will be presenting at the Roth Conference in Laguna Niguel next week, and enthusiasm for its shares were evident on Friday, when the stock closed up 4% at $7.16 on unusually high volume of 74,000 shares.  Their yearly range is $3.70 – $8.30, for a current market cap of about $43 million.

Also worth a peek is Eatontown NJ-based Emrise Corp* (NYSE Arca: ERI; http://www.emrise.com/), a maker and purveyor of OEM products for military, defense and other applications in electronics and communications.  Currently one has to note that there is a problem to be solved at Emrise with regard covenants on its credit line, but the company continues to receive a flow of military orders, including one announced last Thursday: http://finance.yahoo.com/news/EMRISE-Corporation-Receives-bw-3764689376.html?x=0&.v=1.  ERI shares staggered after news of the credit situation last year, and were trading at $0.61 on Friday at the close, vs a 52-week range of $0.52 – $1.70.  Volume is low, because the next big date in the credit situation is in June.  That said, revenues seem to be growing and gross profit going up.

Fairfax VA-based Argon ST (Nasdaq: STST; http://www.argonst.com/) is another interesting company that may not be on too many radar screens.  It is a jack-of-all-trades in the electronic warfare business, and we don’t have nearly enough space here to list the areas from navigation and geolocation, to threat simulation, to underwater acoustic systems.  Looks a bit like a “Company” partner, but the stock trades ok, with 50,000 shares changing hands on Friday, closing at $25.72 vs a 52-week range of $17 to $26.50, and a market cap of about $560 million.

And if you like the values offered by good cross-border companies, have a look at Brisbane, Australia-based Metal Storm (http://www.metalstorm.com), which trades on the ASX under the ticker symbol MST, and OTC in the US under the ticker MTSXY.PK.  The OTC listing is an ADR, and has been trading better than a lot of cross-border ADRs.   MTSXY has a proprietary “stacked technology” that allows projectiles to be fired from a multiple-barreled weapon (MAULtm) whose ignition has no moving parts.  The government of Canada is a recent buyer (http://finance.yahoo.com/news/Metal-Storm-to-Deliver-MAULTM-iw-618012473.html?x=0&.v=1), and Metal Storm has an office in Arlington VA within kissing range of the Pentagon.  The ADR closed Friday at $0.29 against a 52-week backdrop of $0.27 – $0.90, so there may be some room there.

*client of Allen & Caron, publisher of this blog

Time to Look to Sea Again? Marine Transport Enthusiasts Bid Stocks Up

Over the years we have worked with numerous marine transport companies, and have found the industry in general to be both interesting and, from time to time, significantly over- or undervalued.  One thing cannot be denied: the largest method of intercontinental transport is on the oceans and seas.  According to Yahoo! Finance, marine transportation is one of the “industries on the move” these days: http://biz.yahoo.com/ic/775.html.  Not surprising, and some of the gains are impressive.

Putting aside passenger lines, which are largely recreational, there are basically three large international categories of marine transport companies: (1) tanker companies, which carry “wet” cargoes that are often energy-related, as in crude oil or refined petroleum products, but could also be cooking oil or a variety of other liquid cargoes; (2) dry-bulk companies, which, as the name implies, carry dry cargoes of a wide variety, such as grains, scrap metals, coal, or ores; and (3) container companies, which carry anything that can be put into a standard freight container.   There are also some smaller categories, such as companies that carry compressed gases like LNG; or companies that operate vessels with a limited geographic range, such as barges, tugboats and riverboats of various kinds.

Most of the publicly listed marine transport companies are in one (or sometimes more) of the 3 main categories: tankers, dry-bulk, or containers.  The industry is further divided into companies that lease their vessels for lengthy periods (long-term time charterers) and those that lease their vessels for shorter times or even for short terms or for individual trips, pricing their services on the spot market, which fluctuates depending on demand.

Like the real estate market, the marine transport industry tends to follow boom-and-bust patterns.  In good times they over-build new vessels, which tends to create an over-supply of carrying capacity that sends rates down.  Put simply, when there are lots of carriers with empty ships,  rates go down.  We seem to be just coming off the bottom of one of those cycles, when “new-buildings” flooded the markets based on the boom shipping rates that prevailed at the beginning to the middle of the last decade.

Also like the real estate industry, when there is an over-supply that causes a rate plunge, some of the weaker companies can be forced out of business, which may create an even larger surplus of vessels as fleets are liquidated.  At the same time, there tends to be an increase in retiring older vessels, which are typically stripped and moored off countries like Bangladesh, where they are eventually cut up for scrap if all goes according to plan.

It was not until fairly recently that many marine transport companies were publicly traded.  Most were  privately held, many of them by Greek or Italian or Scandinavian owners, frequently multi-generational families.  But the large US investment banks “discovered” shipping companies as major users of capital, and flooded the industry with cash.  Then traditional commercial banks doubled up the cash available with debt leverage, since the equity spigots were flowing to make the balance-sheet ratios work.  One of the main results has been that there are now a wide variety of small-cap shipping companies whose shares may well be of interest to buyers familiar with the vectors that affect the business.

We do not recommend stocks; we just write about companies we find interesting.  Do your own diligence.  None of these companies is a client of the publisher of this blog.

One company that pops up on lists pretty regularly is Athens-based Diana Shipping (NYSE: DSX; http://www.dianashippinginc.com/). With its relatively conservative balance sheet, Diana’s stock has more than doubled since December 2008, when it hit a low of $7.24 — as of Friday, shares closed at $16.09, vs a 52-week high of $19.00, and trading volume exceeds 2 million shares per day.  Diana is a dry-bulk company, and anyone interested in dry-bulk shipping should become familiar with the “Baltic Dry Index” or BDI, which publishes rates for cargoes of various sizes daily.  A recent article in thestreet.com labels Diana a “winner,” quoting Cantor Fitzgerald analyst Natasha Boyden on the effects of heavy iron-ore buying in India as one of the influences: http://www.thestreet.com/_yahoo/story/10655224/1/dry-bulk-shipping-winners-genco-diana.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA.

The other winner mentioned in that Yahoo! Finance article is New York-based Genco Shipping & Trading (NYSE: GNK; http://www.gencoshipping.com/), a newish company (2004) that operates 30+ ships (the largest of them are all named after Roman emperors) in the dry-bulk trade.  As of September 30, 2009, their earnings stood at $3.62 per share, although Genco used more cash in “investing activities” than it generated from operations, which is a good indicator that they see good deals afloat.  Their fleet is a combination of new and used vessels, with a predilection for sister ships (which are generally thought to simplify maintenance issues).  GNK shares closed Friday at $25.68 on average volume of nearly 2 million shares, and a market cap of about $815 million.

Bermuda-based Knightsbridge Tankers (Nasdaq: VLCCF; http://www.knightsbridgetankers.com/) is on the “wet” side of the business, as the name indicates.  It is much smaller than Diana or Genco, and owns 6 vessels; it had earned $0.74 per share as of 9-30-09, and the balance sheet showed a precipitous drop in cash, especially considering its short-term liabilities (look for yourself).  At any rate, the shares closed Friday at $14.96, down from a year-high of $17.16, but up $0.93 on the day, on volume of 111,000 shares and a market cap of about $256 million.

Hong Kong-based Seaspan Corporation (NYSE: SSW; http://www.seaspancorp.com/) is a container-ship operator which announced the delivery of its 43rd vessel on January 8 (it has 25 more on order), which are typically chartered for long periods at fixed rates to big shipping companies like Maersk, Hapag-Lloyd and Mitsui.  Seaspan reported revenue for 9-30-09 of $207 million, actually a significant increase over 2008 (unusual in this industry), and says it has arranged for all the capital needed to complete the build-out of its intended fleet.  SSW shares closed Friday at $10.28, with a 52-week high of $13.07, but up $0.48 or nearly 5% on the day on heavier-than-normal volume of 477,000 shares.  Its market cap is just shy of $700 million, but one should endeavor to understand its issuance of preferred shares prior to making an investment decision.

There are many publicly listed shipping companies, but we will close this article with a glance at Athens-based Euroseas (Nasdaq: ESEA; http://www.euroseas.gr/), with a fleet of 15 vessels, 6 of which are dry-bulk carriers, with the remainder being container vessels, with a clear preference for long-term charter deals.  ESEA is much smaller than the other companies in this article, with a market cap as of Jan 8 of $133 million.  Its 9-month revenues of $47 million were just higher than its previous-year net earnings for the same period ($43 million), with profits for the 2009 9 months of $700,000 — but net income for the third quarter by itself was $2.2 million, which means things were trending up fairly strongly at least last fall.  ESEA shares closed Friday at $4.32 vs a year-high of $6.31 on average daily volume of 110,000 shares — but the shares were up $0.26 on the day, a gain of more than 6%, which reflects a gain in enthusiasm for the company and possibly the industry, at least on January 8, 2010.