The container shipping industry has gone through a brutal downturn over the past couple of years. Too much capacity and sluggish global trade sank profitability to such an extent that one of the world's largest shippers collapsed under the weight of its debt. However, industry conditions improved dramatically since that wash-out movement.
That's evident by looking at the recent financial results of container leasing giant Textainer Group Holdings Limited (TGH) and container ship charter leader Seaspan Corporation (ATCO). During the third quarter, for example, Textainer finally returned to profitability while Seaspan's steady recovery continued. That said, while the uptick in market conditions has catapulted Textainer's stock up more than 125% over the past year, Seaspan's has continued to sink, with it down more than 35%. That underperformance suggests Seaspan has much more upside as market conditions keep improving, which is why I think it's the better buy right now.
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The bull case for Textainer Group Holdings Limited
While Textainer's stock has soared over the past year, it still hasn't fully recovered from the downturn in the container industry since it's down more than 35% over the past three years. Because of that, it could have significant upside ahead of it. One driver of that view is the company's investments over the past several months, which should drive incremental earnings growth in the next year. The company spent $500 million on new containers since the start of 2017, which will start bolstering its bottom line over the next year, once customers start taking delivery. Textainer noted that it expects to earn mid-teens returns on these additions thanks to the rates it secured on the new leases.
In addition to the upside from those new containers, Textainer has embedded upside from its existing fleet. CEO Phillip Brewer pointed out last quarter that:
Over the coming years, we will benefit not just from the projected continued strong growth in container trade but also from revenue upside from lease repricing. Leases maturing in 2018 have average rates of $0.56 per CEU per day and this figure declines to $0.36 per CEU per day by 2021. These rates are well below current new and depot container rental rates. If current market conditions continue, as these leases reprice any increase in rental revenue will flow straight to our bottom line.
In other words, the company could see a significant surge in profitability just by securing higher-priced leases for its existing fleet as current contracts expire. That upside, when combined with the company's ability to continue buying new containers, has the potential to deliver substantial profit growth in the coming years, which should keep pushing the stock higher.
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The bull case for Seaspan Corporation
Seaspan also has dual upside from a combination of organic and acquired growth. On the organic side, Seaspan owns several smaller ships that it typically leases to short-term, market-rate contracts. Charter rates on those vessels plunged during the downturn and were below break-even levels at one point, but they have recovered significantly over the past year. That said, the average charter rate of Seaspan's short-term fleet remains well below current market rates, which should enable the company to secure higher prices for them as existing agreements expire over the next year. In addition to that, the company noted that it has significant rechartering upside for five of its larger vessels that have charters expiring in the near term since current market rates for those container ships are 50% to 100% higher than the existing contracts.
In addition to that upside, the company plans to continue adding to its fleet. It's currently exploring several options, including buying vessels with existing long-term charters as well as pursuing creative partnership opportunities with shipping companies. Further, the company's Chairman of the Board, David Sokol, noted on the third-quarter conference call that some of its customers gave it "bit of hunting license to fill some gaps they have," which enables the company to buy vessels that it can then charter to meet those specific customer needs. Seaspan has built up significant financial flexibility over the past couple of years, so it is "well positioned to capitalize on growth opportunities that may arise during this period of improving industry fundamentals," according to Board Chair David Sokol.
Both have upside, but Seaspan seems to have more
With market conditions on the upswing, it appears as if the financial results of both Seaspan and Textainer should significantly improve over the coming years, which could drive their stocks higher. That said, Seaspan seems to have more upside potential because its steadily sinking stock price currently has it trading for a dirt-cheap valuation of 6.8 times its enterprise value to EBITDA, which is well below Textainer's current 11 times EV/EBITDA multiple. That cheaper value, when combined with its earnings upside, makes it the better buy between the two, in my opinion.
