How did that Chinese-made toy, garment, or tech gear you own get from where it was made to where it was sold to you? The answer is likely that it traveled on a huge boat filled with all sorts of other stuff you buy. International trade is dependent on the high seas because it's cheaper to travel by water than air or ground. And that's why you might want to watch dry-bulk shippers such as Navios Maritime Holdings (NYSE: NM), Eagle Bulk Shipping (NASDAQ: EGLE), and, from a different angle, Textainer Group Holdings (NYSE: TGH).
Before it's a product
When it comes to moving things over the world's oceans, the first place to look isn't completed goods. It's building blocks such as iron ore and coal, which together make up nearly 60% of the dry-bulk market. Other commodities, including grain, scrap metal, and wood, make up the rest. And that's where companies such as Eagle Bulk Shipping come in. Eagle is the largest U.S.-based owner of dry-bulk ships, with more than 40 of these massive ships.
A bulk carrier being unloaded. Source: Mick Garratt, via Wikimedia Commons.
I use the word "massive" purposefully, because the ships Eagle Bulk owns are on the larger side, called supramax. This is important, because the more you can get on a boat, the cheaper it is to ship. So size really does matter when you're looking at bulk shipping. There's been a little turmoil in the management ranks at Eagle Bulk Shipping of late, but that doesn't change the makeup of the company's fleet.
That said, shipping rates wax and wane with demand and the supply of ships available for charter. And the last couple of years have been rough on the demand side, with Chinese growth slowing down and a general oversupply of most commodities, and particularly iron ore and coal, taking a toll on shipping rates. Thus, Eagle has been bleeding red ink. But when rates move up, top- and bottom-line results should swing higher again.
A little more diversification
One way to deal with the ups and downs in dry bulk is to spread your bets. For that, investors might want to look at Navios Maritime Holdings. This shipper, through its various subsidiaries, controls over 65 ships (40 are owned). But it estimates that only about 27% of its enterprise value is related to the type of dry-bulk ships that Eagle primarily runs. The rest is made up of container ships (23%), oil tankers (34%), and the company's South American Logistics business (18%).
Although the tanker business is clearly outside the dry-bulk space, container ships are what transport clothing and other dry goods. And South American Logistics is basically a dry-bulk shipping business, including storage facilities, barges, and ships, located in South America. So roughly 70% of Navios is tied to dry bulk, only it's more broadly diversified than Eagle.
The pricing downturn in the shipping industry has taken a toll on Navios just like Eagle, but Navios hasn't bled nearly as badly. For more conservative types, that might make Navios a better option.
Big shipping boxes. Source: Magnol, via Wikimedia Commons.
Stuff to put things in
Now for something completely different, because there's another side to dry bulk -- containers. You've seen the giant steel boxes called intermodal containers that get used to transport finished and unfinished goods around the world. Although shipping lines often own these boxes, many are leased from companies such as Textainer.
This is more of a finance business than a shipping business, but the two are tightly related since demand for containers is driven by shipping needs. Textainer lays claim to being the world's largest lessor of these steel boxes. The interesting thing about this business is that it has much higher margins than actually running the ships on which its boxes ride.
For example, according to Textainer, between 2005 and 20012 the operating margins at shipping lines bounced around from around positive-10% to negative-10%. Meanwhile, container lessors' operating margins remained roughly 40% or higher throughout. This period is noteworthy, because it includes the deep 2007 to 2009 global recession -- which is exactly when shippers saw operating margins plummet. Container lessors weathered that downdraft in stride.
That said, container owners have to face their own host of issues. For example, it's important to watch how many of the company's containers are leased at any given time (the more the better) and how long the average remaining lease term is. There's also the issue of low steel prices and historically low interest rates that are combining to make entering the container-leasing market relatively cheap for new entrants of late. These factors, in turn, have been keeping a lid on lease rates. But with such high margins and a giant fleet, Textainer is well positioned to ride out this storm just as it did the recession.
Shipping the dry way
Unless there's a major disruption in international trade (think "world war" big), moving materials around the globe on the oceans will remain an important business. Like other businesses, it goes in and out of favor, but that doesn't mean you shouldn't be watching the dry-bulk shipping industry. And Eagle Bulk, Navios, and Textainer offer three different ways to play the space. All are worth a deeper dive.
