Is Navios Maritime Holdings Inc. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Navios Maritime Holdings (NYSE: NM  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Navios' story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Navios' key statistics:

NM Total Return Price Chart

NM Total Return Price data by YCharts

Passing Criteria

Three-Year* Change

Grade

Revenue growth > 30%

(20.1%)

Fail

Improving profit margin

39.6%

Pass

Free cash flow growth > Net income growth

142.4 vs. 1.5%

Pass

Improving EPS

9.9%

Pass

Stock growth + 15% < EPS growth

83.5% vs. 9.9%

Fail

Source: YCharts. * Period begins at end of Q3 2010.

NM Return on Equity (TTM) Chart

NM Return on Equity (TTM) data by YCharts

Passing Criteria

Three-Year* Change

Grade

Improving return on equity

(8.7%)

Fail

Declining debt to equity

(45.1%)

Pass

Dividend growth > 25%

0%

Fail

Free cash flow payout ratio < 50%

16.2%

Pass

Source: YCharts. * Period begins at end of Q3 2010.

How we got here and where we're going
Navios Maritime doesn't quite come through with flying colors, but five out of nine possible passing grades is a reasonable performance from the long-beleaguered shipping sector. Navios and its peers have been suffering from a weak macroeconomic environment, which has produced poor revenue growth over the past three years. However, Navios' stock growth has recently outpaced gains in its net income, which reflects investor's optimism on the future of shipping as rates begin to rebound. Will Navios be able to rebound on the back of a stronger global economy, or will the dry shipper be tarnished for some time to come? Let's dig a little deeper to find out what lies ahead

Dry-bulk shipping companies such as Navios Maritime and DryShips (NASDAQ: DRYS  ) have surged along with the Baltic Dry Index, or BDI, which has been moving higher -- with some violent wobbles along the way -- and which now stands at roughly 1,400 points, up over two thirds in the past year:

^BDIY Chart

^BDIY data by YCharts

This has the obvious effect of pushing daily average charter rates higher. Fool contributor Sean Williams notes that the positive trend in BDI levels should help shipping companies secure long-term contracts at higher charter rates, which both Navios and DryShips avoided doing last year while the index dawdled at rock-bottom prices. However, erratic moves in the BDI could also dissuade companies in need of shipping services from signing on, as they might wish to pounce on a plunge for preferable prices.

Navios' Peer Diana Shipping (NYSE: DSX  ) sports a healthier balance sheet than either DryShips or Navios, which have about $4.8 billion and $1.2 billion in total debt, respectively. However, the potential for a long-term rebound in shipping rates has helped Navios' stock outperform its peers during our three-year tracking period:

NM Total Return Price Chart

NM Total Return Price data by YCharts

Fool contributor Nickey Friedman notes that dry-shipping companies should also benefit from the soaring demand for iron ore in China, which is likely to continue through 2014. Improving conditions in the dry-bulk industry ought to help Navios and DryShips produce substantial returns through their diversified service offerings, but Diana Shipping -- a pure-play dry-bulk player -- might see less stable growth, as the BDI's rebound won't be a quick fix for the entire shipping sector. On the other hand, the opening of Northern Sea Route -- the Arctic Ocean shipping lane north of Russia, or "the Golden Waterway" -- will drastically cut distances between various Asian, European, and North American markets, allowing shippers to save on time, fuel consumption, and other associated operating expenses.

Ship overcapacity is also likely to persist for the next couple of years, regardless of the ongoing retirement of older ships. However, excessive scrapping, as well as slower order growth in new ships, is expected to push day-rates higher in 2014 and beyond. Navios isn't simply reducing its fleet size, however -- the company announced the sale of five million shares to raise cash to buy new ships. Navios CEO Angeliki Frangou has also promised that the company will increase dividend payouts if the dry-bulk environment improves, providing another impetus for investors. George Soros' fund recently purchased a small quantity of Navios shares, which could signal to value-oriented investors that this well-diversified shipper is a solid near-term bet.

Putting the pieces together
Today, Navios Maritime Holdings has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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