Seaspan Corporation (NYSE:SSW) hasn't given investors many reasons to love it in recent years. Instead, many likely loathe the company given that its stock price has been cut half this year alone due to the continued headwinds of a challenging shipping sector.
That said, while it's not my favorite stock holding by any means, I still love what I see when I look at its long-term potential to create value for investors. In fact, my attraction to the company is starting to grow thanks to three recent developments that have me thinking about adding to my position.
A turnaround may be right around the corner
One of the reasons Seaspan Corporation's stock has fallen so sharply is that its earnings have dived, dropping by more than 40% over the past year. The company, however, appears to be turning the corner thanks to some recent improvements in the shipping sector. For example, container demand growth is up 5% versus last year, which is its highest rate in years. This rebound is pushing up rates for both containers and shipping vessels.
Those improving market conditions are having a noticeable impact on Seaspan Corporation's financial results. Revenue, for example, rose sequentially last quarter after tumbling over the past year. Cash flow, likewise, has started to improve, increasing from $71 million in the first quarter to $95 million last quarter. Those financial results should continue progressing in future quarters given the strengthening market conditions as well as the benefit from recent additions to Seaspan Corporation's fleet and its ability to drive out costs.
Another evidence that conditions are turning around is that the company has finally found a customer for its previously uncontracted newbuild vessels. As a result, it will accept delivery of these ships next year when they'll begin three-year fixed-rate charters, which will provide a further boost to revenue and cash flow.
It shored up its balance sheet
Aside from the slide in its financial results, another weight on Seaspan Corporation's stock over the past year has been its balance sheet. However, the company has aggressively secured new financing that has shored up its situation. Last quarter, for example, it was able to reduce net debt by $147 million, which brought its total debt reduction to $650 million over the past 18 months. This decrease has significantly improved the company's leverage metrics so that net debt to equity, for example, is now below 1.6 times, which is well within its target of below 2.0 times.
That improving balance sheet gives the company the flexibility to pounce on opportunities as market conditions improve. That will enable it to meet its goal to opportunistically acquire vessels that enhance its long-term contract backlog, which at the moment stands at $4.8 billion in revenue with an average remaining term of 4.8 years. If Seaspan can add several vessels that come with a predictable revenue stream, it could help the company quickly boost earnings.
Its valuation is very attractive
Given the decline in Seaspan Corporation's stock price this year, the company now trades at a very attractive valuation, especially in light of its improving financial situation. At its current trading price, the company sells for less than 3.0 times free cash flow and less than 7.5 times its enterprise value to EBITDA. Furthermore, even though it slashed its dividend earlier this year, it still yields an eye-popping 6.9%. That valuation is quite compelling in today's red-hot market.
It's also a bit cheaper than rival containership leasing company Costamare (NYSE:CMRE), which sells for 3.6 times free cash flow. On top of that, Seaspan offers a higher current yield than Costamare's 6.3%. That discount suggests that Seaspan could outperform both the market and Costamare in the years ahead.
The tide seems to be about to turn
While Seaspan Corporation's performance has been dismal in recent years, the company appears ready to move past that tough stretch. In fact, with its improved financial flexibility, the company has the firepower to grow at a brisk pace if it can find the right boats to buy. Add in a compelling valuation and its performance over the next few years could endear it to investors who buy today.