Navios: Enigma of the Seven Seas

As someone at Navios Maritime Holdings (NYSE: NM  ) is about to find out, the difference between Capesize and Capsize is just one simple letter.

Aside from a welcome chuckle, the typographical error I recently encountered on the company's website (find it here) serves as a timely reminder of the incredibly challenging business environment that awaits a flood of new dry bulk vessels set to enter the global fleet over the coming months and years.

Even while posting an impressive 110% surge in net earnings to $46.5 million, Navios offered little in the way of upbeat analysis of the dry bulk environment. Citing "sluggish growth" in the developed economies, and "a significant order book," Navios made "caution" the word of the day even as the company pursues aggressive countercyclical growth.

For these reasons, Navios has become something of an enigma to this Fool ... a shipper that straddles the middle of the vast ocean between my top sector pick Diana Shipping (NYSE: DSX  ) on the one hand, and my pet whipping post DryShips (Nasdaq: DRYS  ) on the other.

Navios' track record of securing charter contracts on new vessels before delivery helps to keep its growth spurt from sailing right past available demand. In fairness to DryShips, however, I hasten to point out that Navios' net debt-to-capitalization ratio of 48% is far more severe than even DryShips' recent mark of 33%. Also, Navios' recent sale of a Capesize vessel to subsidiary Navios Maritime Partners (NYSE: NMM  ) -- at a pre-crisis price of $110 million -- smacks of the same questionable dealings that I have long criticized DryShips for.

Navios made a point to mention that few companies in the sector are paying dividends (Navios Maritime Holdings presently yields 4.3%), but at the same time reminded investors that the yield is not guaranteed going forward. Meanwhile, Genco Shipping & Trading (NYSE: GNK  ) spin-off Baltic Trading (NYSE: BALT  ) yields 5.8%. Now that Navios has launched into the tanker business with the pending purchase of seven very large crude carriers, Fools may wish to note that well-established tanker operator Frontline (NYSE: FRO  ) carries a very attractive dividend yield of 9.9%.

Complicating interpretations of the potential pitfalls of Navios shares, I remind Fools that the sector's shares have already been brutally battered. Navios shares trade at a 48% discount to shareholder equity and a 40% discount to book value. Some of the apparent risk has been priced in, and I'm interested to know your thoughts regarding whether current share prices present an acceptable risk-to-reward ratio. Please join the free Motley Fool CAPS community to cast your vote and share your comments below.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Baltic Trading and Diana Shipping. The Motley Fool's disclosure policy can hold its breath underwater while a cargo ship passes overhead.


Read/Post Comments (7) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2010, at 3:22 PM, psl8er wrote:

    Finally someone else has seen through the Navios BS. This company is highly leveraged against the current market value of its assets, has diluted its equity holder's values continuosly while the family continue to milk it for management fees, commissions etc and even selling ships at inflated prices from the private companies to the public ones.

    Their charter cover is heavily dependant on profit sharing which is currently producing nothing.

    The move into the tanker sector is a reckless excursion which again produces more benefits for the family than the public.

    With a slew of large drycargo ships still to deliver over the next two years this company will be lucky to stay afloat.

  • Report this Comment On August 20, 2010, at 8:21 PM, benpub1 wrote:

    umm, maybe you have NM confused with another shipper. They have not diluted the company, they do not sell ships from private companies then to public. The 110 million sale was for a ship with a huge long term charter of about 140 million dollars attached with the revenues insured. It was sold to a public entity and was immediately accretive to NMM earnings. There are about 110 million shares and any dilution has come from ship sellers willingness to take shares as payment for ships. 8 new capes coming in over the next few quarters will blow up the earnings. There is no family involved, the ceo has an ownership stake of about 28% of the stock. All ships are chartered and the revenues are insured. The growth comes from more available days from new ships that are all contracted out with the contracts insured. It does take some intelligent research to understand the company, which I'd suggest readers and writers do. There are a lot of moving parts to NM, but all are working. IMO NM is severely undervalued and this time next year will be a double digit stock. Company will have great cash flow as the new ships are delivered, since they have been covering debt payments on the newbuilds already. There was a reason the earnings were up significantly, more ships equals more dollars. Dividend is almost completely covered by the payouts from NMM. This is not a DRYS. Do some real research and you may just change your tune.

  • Report this Comment On August 23, 2010, at 10:43 AM, XMFSinchiruna wrote:

    benpub1,

    Thank you for the well-presented response. You are absolutely right ... I missed the fact that the vessel transaction included a very attractive charter contract for $42,250 per day through July 2019 ... and I missed it because the press release of 5-20-10 from Navios Maritime Holdings (NM) made no mention of it.

    In fact, scrutinizing the longevity of Navios' charter contracts relative to competitors, the company has done an amazing job locking in revenues for the better part of the decade.

    I have been a longtime admirer of Navios, but also a longtime voice of caution regarding the severity of the ongoing down-cycle for drybulk. At the intersection are some difficult calls, but you are correct to point out that despite the high debt burden, Navios is generally in a far stronger position than many competitors.

    Fool on!

  • Report this Comment On August 23, 2010, at 2:20 PM, Hohum777 wrote:

    A couple of points

    - I agree Angeliki comment regarding dividends is out of place. IMO, I think she actually means shipping peers (DSX, DRYS, EXM, GNK) since many of the smaller Dry bulk shippers (ESEA, SBLK, SB, PRGN) have continued to pay a dividend

    - The NM debt-to-capitalization may look high, but their newbuilding program is fully funded. All 8 new Cape vessels have complete financing in place. When the vessels deliver, that ratio will improve.

    - NMM acquired a Cape from NM for $110M. Besides the 9.5-year charter worth about $140M in revenue, you missed two other points. NM took the proceeds, and acquired another newbuild Cape for $55M (delivery in 2011) - a debt free acquisition. NM also paid down some debt.

    - NM owns about 30% of NMM, and the addition of the vessel helps maintain the safety of the distribution. So NM also continues to gain indirectly from the transaction via the distribution.

  • Report this Comment On August 23, 2010, at 2:21 PM, alienkeeper wrote:

    Cheers to Benhub1 with his detailed explanantion of the true "goings on" at Navios. I would love to hear a rebuttle from the author at the Fool who wrote this article. Thanks again Behub1 for getting the story straight

  • Report this Comment On August 23, 2010, at 4:59 PM, Hohum777 wrote:

    allenkeeper,

    TMFSinchiruna is the author.

  • Report this Comment On September 02, 2010, at 9:54 AM, shippingscam wrote:

    IMO the author, Mr. Barker, is correct to be skeptical. Some of you, have no clue what Greek shipping is all about. I was there, worked for them, got sick to my stomach and left. These companies are intricate schemes to support a lavish life style. American investors havce no clue. It is so complicated. Just a few examples: each time the shipowner wants to buy anopther expensive present for their girlfriend or boyfriend they can arrange for another transaction, another time charter, another accident or machine failure and get their kickbacks. Specific example: arrange with the captain that the generator broke down, get a cheap one at some port for replacement and actually sell the original one that works get the money but charge it as loss to the investors.

    The SEC too had no clue. They should not have allowed Greek shipping to list and rip off American naive investors. The reason that these Greeks wanted to get listed, something that they avoided for a long time, is that the banks now know all their tricks and they want co-management. If you, American investors, get a glimpse of the lavish lifestyle these people enjoy with your money you will get sick.

    My girlfriend was working for a Greek company and her boss asked her to sleep with a banker and convince him to issue a loan. She quit and she was not able to get another job in this industry. These are the typical methods these people use. The banks are now aware and they ahve put in place safeguards.

    Now, as far as the NM transcation to the other company that was a criminal act and I wonder why the SEC is not investigating it. That ship hardly worths 60 Million today but it was sold for 110 Million because it has a time charter. Now, this is important, it should be investigated very carefully, what these long term charters are, their terms. Who has signed for them and whether there are allowances for re-negotioation in them or the shippers invoking some clause and stop paying. Actually, it should be investigated whether behind such long term contracts also hides some pyramid scheme Ponzi style.

    I would also like note that there are some very legitimate shipowners in Greece, a few listed, and some private. But anyone how knows anything about shipping knows that with 100% financing in a volatile market, gains from operating ships average to zero in the longer term, this has been proven. Shipping in the longer term can only be profitable with accurate timing for purchase and sales of ships, something that is very difficult to do. Thus, the growth, if any, is either due to excesive risks, or clever accounting and this type of business should not be publicly listed.

    Thank you for your attention.

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