The Great Recession doled out its fair share of carnage. After housing, the shipping industry may have endured the most pain since the 2007-2008 market downturn. Notoriously cyclical, these stocks still languish significantly below their pre-crash levels. And while they certainly carry all sorts of associated risks, some of these shippers' current multiples seem almost too low to be true. To separate potential winners and losers, I enlisted a group of our best-informed analysts to discuss where, if anywhere, they see opportunities in this beleaguered sector.
The Baltic Dry Index has been crushed. In just five years, the index, which measures the charter rates of various dry bulk vessels, has sunk from more than 11,000 to its current levels of 1,330. A global slowdown in shipping demand, coupled with an overabundance of shipping vessels, has crimped gross margins and drastically reduced daily charter rates.
All hope is not lost, though. In fact, opportunity appears to be knocking, perhaps even pounding, at the door of Genco Shipping & Trading
In order to see the good in Genco, you must first see the bad. Genco's daily time charter rates, or TCE, have been pummeled. In its latest quarterly filing, its TCE fell by 36% over the year-ago period. Profitability is a priority for management, but it's looking far less likely in 2012, based on these recent results. Revenue rose over the year-ago period, but that was largely because the company added 13 new vessels to its fleet.
Still, there's plenty to like about Genco. For starters, the company has chosen to only take on short-term charters. While DryShips
The company's balance sheet is a diamond in the rough in a sector filled with lumps of coal. With $282.5 million in cash on hand, Genco is able to weather industrywide downturns with ease. Now trading at 0.20 times book value, it appears Genco has nowhere to go but up.
I expected a rough ride for Baltic Trading
But while the outlook for highly leveraged operators like Eagle Bulk Shipping
Moreover, I consider Baltic Trading a well suited vehicle for navigating through the remainder of these tumultuous seas and the inevitable recovery period to follow. Although it's presently fairly cash-strapped, and facing additional losses as spot charter rates have dipped below the company's break-even rates, I believe the company's modest degree of leverage will enable it to withstand these near-term pressures until spot rates correct back to breakeven or better. Thereafter, I believe the shipper's unique dividend policy -- whereby all net income (less fleet-related capital expenditures) is returned directly to shareholders -- will ensure Baltic Trading shareholders relatively swift and tangible rewards from potentially calmer seas to follow.
Full disclosure: I hate shipping stocks. The industry simply harbors too many generally unfavorable business conditions, indefensible moats, and shady operators who treat investors like ATMs. But if you insist on investing in one, let me at least throw you a slow pitch over the plate, to increase your odds of hitting a home run. Golar
First off, it isn't Greek. That means Golar should be more insulated compared to its Hellenic competition if Greece's economic woes get worse. Second, Golar operates in the only non-impaired part of the industry, liquefied natural gas (LNG). Increased demand means higher LNG spot rates, and Golar is the only player with significant direct exposure to spot rates over the next several years. A comically high P/E of 100 belies Golar's super-reasonable PEG of 0.59. It cranked out twice as much free cash flow than net income, and with a 2.6% yield, it pays more than a token dividend.
Risks? Plenty. A global economic slowdown, higher-than-expected Russian production, or China favoring nuclear and coal power instead of developing shale resources, could all put a damper on LNG prices. More specifically, Golar's ROA is nothing to write home about, and its total debt to equity of 200% is high even in this industry.
Golar offers a good chance for market-beating returns -- but if the stock ends up capsized, don't say you weren't warned.