These Boats Have a Moat

For TBS International (Nasdaq: TBSI ) , it's business first, fleet second. The dry bulk shipper's credo implies that this firm is keenly focused on its customer relationships, rather than simply chasing the best charter rates.

The strategy appears to be paying dividends, though not literally. Unlike high yielders Diana Shipping (NYSE: DSX ) , Genco Shipping & Trading (NYSE: GNK ) , and Quintana Maritime (Nasdaq: QMAR ) , TBS doesn't pay a dividend. Like DryShips (Nasdaq: DRYS ) , the firm views fleet expansion as the best use of cash, and it's hard to argue with the strategy, based on TBS' financial results and share price appreciation in 2007.

While the fleet has grown meaningfully since TBS' 2005 IPO, last year was all about higher freight rates. That's because it was a particularly shipyard-heavy year, with more than 1,000 ship days tied up by upgrade and maintenance activity. TBS thus averaged only 33 ships operating for the year, the same as 2006. With average daily rates up more than 60% compared to 2006, though, the sparks still flew. Revenue rose 40%, and the bottom line ballooned over 150%.

TBS' fleet composition is a key differentiator, and this gets back to the matter of customer relationships. A lot of ports don't have the capacity to handle huge Capesize vessels, and plenty of customers have cargoes that can't be containerized but also don't require an entire vessel's capacity. TBS meets these needs by offering up a mix of smaller dry bulk carriers and what are known as tweendeckers. The latter, which are sort of like seaworthy double-decker buses, offer unique flexibility in moving a great variety of cargo items.

Not a lot of tweendeckers have been built in the last two decades, so TBS appears to have carved out defensible market share by grabbing a good amount of these special vessels and targeting underserved "problem cargo" markets. Like Excel Maritime (NYSE: EXM ) or Navios Maritime (NYSE: NM ) , the company's profitability hinges on a bustling global economy, but I'd argue that TBS has more of a moat than most dry bulkers out there.

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