Many dry-shipping stocks trade at market price levels far below the accounting values placed on their books or book value. These huge market value discounts could prove to spell big returns. Let's review three dry shippers' book values, and see which one of them offers investors the biggest potential opportunity.
The basics of book and market value
Book value includes either the price the shipper paid for the assets in question, or their market value -- whichever is lower -- minus the company's debts. Companies that trade at a discount to their book values might be bargains -- but they could also be a market signal that the company's book value itself will soon fall as well.
Market value isn't necessarily resale value. Sometimes the money an asset could make in the future adds up to more than what you'd get if you sold it right now. In order to entice buyers, used assets tend to sell at a discount to the expected cash they'll generate. So market value, to an individual company, may be higher than resale value.
As shipping rates go higher, so do the potential cash profits from those rates. Accounting rules specify that companies can't increase the value of the ships themselves on their books. So if rates have risen sharply, the value listed on a company's books may actually be understated.
In an effort to remain conservative, let's focus on reported book value, while ignoring the possibility that true value could actually be higher.
Which bulk shipper's book value looks best?
Genco Shipping & Trading (GNK 1.54%) has a last reported book value of more than $22 per share, compared to a current stock price around $3 and change. Genco Shipping has liabilities of around $1.6 billion and a book value of its ships at around $2.6 billion, which works out to roughly $1 billion in untapped net value.
This great amount implies that shareholders should expect great cash-flow generation from its ships. So why are its shares trading so low? Genco Shipping's stock price may be beaten-down by investors' fears that it won't be able to pay off the debt it has coming due in March 2014. But if Genco Shipping generates as large a cash flow as its high book value implies, it should have no problem renegotiating with its current lenders, or finding new lenders willing to refinance.
Eagle Bulk Shipping (EGLE) last reported book value of over $36 per share, compared to a current stock price around $7 and change. With liabilities of around of $1.2 billion, and assets of around $1.8 billion, Eagle Bulk Shipping has a net value of around $600 million.
Most of Eagle Bulk Shipping's debt is long-term in nature. If cash flows materialize at the levels its book value implies, $600 million or more should be considered direct shareholder value along -- and its stock price should eventually reflect that value.
Paragon Shipping (NASDAQ: PRGN) last reported book value of nearly $19 per share, compared to a current stock price around $5 and change. When you subtract liabilities of around of $205 million from assets of around $420 million, Paragon Shipping's left with a net value of around $215 million.
Like Eagle Bulk Shipping, most of Paragon Shipping's debt is long-term in nature. If cash flows materialize at the levels its book value implies, shareholders could enjoy $215 million or more in direct shareholder, and a share price to match.
All of this assumes that the management teams even care enough to operate in a way that maximizes shareholder value. Some management teams may prefer to go down with the ship by taking large risks, or selling cheap common shares that dilute shareholder value.
Final foolish thoughts
Of the three companies mentioned in this article, Eagle Bulk Shipping is in the strongest position to return value to shareholders, based on book value. Its debt obligations are long-term, unlike Genco Shipping & Trading, which gives Eagle more time to increase and collect its cash flows.
Paragon Shipping is in a similar situation, but trades at a discount to book value (around 70%) that is less favorable to that of Eagle Bulk Shipping (around 80%). Study the upcoming earnings reports, 10-Q filings, and conference calls of dry shippers such as Eagle Bulk Shipping. Pay close attention to ship book values, debt levels, and cash generation relative to their stock prices.
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