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Better Buy: Seaspan Corporation (SSW) vs. Textainer Group Holdings Limited (TGH)

By Matthew DiLallo - Feb 6, 2018 at 3:05PM

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These shipping stocks have gone in opposite directions over the past year, even though their financial results are both getting better, suggesting that one could have more upside in the near term.

After several challenging years, the container shipping industry is beginning to show signs of life. Lease rates for both containers and ships have risen sharply over the past year. That has enabled both Seaspan Corporation (ATCO -1.62%) and Textainer Group Holdings Limited (TGH -3.20%) to report improving financial results in the last few quarters. That said, while the fortunes of both companies have gotten better, only Textainer's stock has rebounded, with it up nearly 50% in the past year, while Seaspan's has declined another 9%. Because of that, Seaspan's stock seems like it should have more upside from here.

Not getting a reaction

Seaspan has been busy since it last reported financial results in late October. The company took delivery of two large newbuild containerships that it had already leased to a large shipping company under 17-year contracts. As a result, those boats will immediately boost earnings in the coming year. In addition to that, the company announced that it secured a $250 million investment from a well-known investor to help fund future growth initiatives and pay down debt. The company quickly put some of this money to use, buying two small containerships that it immediately leased to a shipping giant under four-year contracts.

Container ships in the water with birds flying by under a blue sky.

Image source: Getty Images.

Despite adding four new cash-flow streams and bolstering its financial situation, Seaspan's stock has declined about 1% since it last reported earnings. For comparison's sake, Textainer's stock is up more than 10% over that same time frame, mainly because shares rallied after it announced a return to profitability in early November.

Reasons to believe a reversal is drawing near

While Seaspan's revenue and earnings sank for much of last year versus 2016's results, they were improving on a quarterly basis. That should accelerate in 2018 because several headwinds that had been holding the company back should reverse and become tailwinds this year.

For starters, the company has several smaller vessels under short-term contracts that will expire this year. Those leases are well below current rates, meaning the company should be able to secure more lucrative agreements that would immediately bolster the bottom line. In addition to that, the company has a few long-term contracts on larger boats expiring this year that were 50% to 100% below recent rates. If the company can secure new higher-rate contracts, those agreements will also immediately boost earnings. Finally, as noted earlier, the company has added several more boats to its fleet in recent months and has a couple more on the way. These new additions will also help nudge the company's financial results higher this year.

It is worth noting that Textainer should enjoy a similar shift this year. The company said it invested roughly $500 million through the third quarter of last year on new containers, which should boost its results in the coming quarters. In addition to that, Textainer should also benefit from repricing leases since recent rates were well above those of contracts that expire this year. Those dual catalysts should drive revenue and earnings higher this year and might even enable the company to reinstate its once-lucrative dividend.

Both have upside, but one seems to have more

The container shipping sector is clearly starting to recover. That has enabled both Seaspan and Textainer to report improving financial results in recent quarters, with that recovery likely to continue throughout 2018. That said, investors have already priced much of that improvement in Textainer's stock price since it's up so sharply in recent months. Because of that, Seaspan looks like the better buy right now since its shares appear to have much more upside as its recovery starts accelerating this year.

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Stocks Mentioned

Atlas Corp. Stock Quote
Atlas Corp.
ATCO
$10.94 (-1.62%) $0.18
Textainer Group Holdings Limited Stock Quote
Textainer Group Holdings Limited
TGH
$27.79 (-3.20%) $0.92

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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