Seaspan Corporation (NYSE:ATCO) shares have been in a seemingly unending downward spiral. Last year wasn't any different: The container ship leasing company's stock lost more than a quarter of its value, pushing its three-year slide to more than 70%.
That said, it wasn't all bad news, as the company's financial results finally started turning the corner. Shares ended the year on a high note, rallying 15% last month thanks in part to an analyst upgrade, fueled by the belief that 2018 will be a much better year for Seaspan stock.
What went wrong in 2017
Market conditions in the shipping industry were still very challenging at the beginning of last year. As a result, Seaspan slashed its dividend by two-thirds to give it a bit more financial flexibility. Those tough conditions persisted throughout most of the year, which caused the company's financial results to come in significantly below 2016's. In the third quarter, for example, the company posted $211 million in revenue, which was 6.2% lower than the third quarter of 2016, while normalized earnings per share declined 37.9% versus the prior-year period.
These factors forced Seaspan to spend much of the year raising capital to shore up its balance sheet. The company grabbed as much money as it could, including issuing debt, obtaining loans, and selling stock, which enabled it to secure the cash needed to finance the remaining ships it had under construction. That said, Seaspan paid a high price for that capital, including issuing enough new stock to increase shares outstanding by nearly 15% through the third- quarter. That dilution was just another thing to weigh on the shipper last year.
In addition to those industry challenges and financial concerns, the company has had an internal issue to overcome involving co-founder and longtime CEO Gerry Wang. In April, the company announced that Mr. Wang had agreed in principle to amend his employment agreement and would enter discussions for additional revisions to that contract and his compensation package. However, the two sides could never reach an amicable agreement, which resulted in Wang announcing his retirement in July. While he initially planned to stay until the end of last year, he officially retired in early November after the company announced the hiring of Bing Chen as its new CEO. That situation left investors uncertain about the company's direction, which put additional pressure on the stock price.
Reasons to be optimistic in 2018
While 2017 was a challenging year for Seaspan, several positives suggest 2018 could be much better. First of all, while revenue and earnings slumped versus 2016, they improved on a quarterly basis. For example, revenue in the third quarter was 3.1% ahead of the second quarter while earnings increased by $0.01 per share.
Meanwhile, several catalysts should drive further improvements in the company's financial results this year. One of the biggest was an expected reversal of one of last year's headwinds, when shipping rates for smaller vessels under short-term contracts plunged. With those rates now much higher, and expected to keep climbing, Seaspan should make more money on these ships in the coming year. In addition to that, the company has several long-term contracts on bigger vessels expiring this year, which were 50% to 100% below prevailing market rates in the third quarter, suggesting it could lock in more lucrative contracts for these vessels in 2018. Furthermore, the company has taken delivery of several newbuild ships in recent months and has more on the way, which should supply it with a growing income stream this year. Finally, Seaspan has the financial capacity to make acquisitions that could further expand its fleet, including recently entering into an agreement for $250 million in capital from a well-respected investor to help finance growth. These factors could combine and fuel a significant rebound in the company's earnings this year.
Down but not out
While last year was a forgettable one for Seaspan investors, it does set the stage for a potential rebound in 2018. If all the company's catalysts come together, then it's possible that its financial results could significantly improve this year, which would help lift the the stock. Investors who are willing to take a gamble on Seaspan could collect a big-time payoff in the coming years.