Navigating Through the Outlook for Navios

Navios has charted a unique course for dry bulk growth.

Christopher Barker
Christopher Barker
Nov 18, 2010 at 12:00AM

A skipper has two options when confronting an approaching storm. The conservative mariner will set a course to circumvent the weather system, while some may feel perfectly safe trudging straight through the mess.

If you can emerge unscathed from the ordeal, of course, the more direct course is likely to ferry you to your destination more rapidly. Like salty sea captains, dry bulk shippers have been forced to navigate similar calculations of risk versus reward when confronting the category-five hurricane that continues to batter the industry at large.

In the estimation of this Foolish captain, Navios Maritime Holdings (NYSE: NM) has selected a course that bisects those two extremes. On the one hand, the company's success at attaching very long-term charter contracts (at favorable rates) to newly acquired vessels has injected an element of safety into an otherwise aggressive spate of countercyclical growth.

Meanwhile, the shipper's weighty debt may tend to slow the stock, or even endanger the ship like an unsealed hatch. Navios' net debt-to-capitalization ratio climbed above 50% by the end of the third quarter, which represents a small increase from levels that already drew my concern in the previous quarter. Although Navios has locked in significant revenue streams through its existing charter contracts, the combination of climbing debt ratios and a 4% dividend yield leaves this cautious Fool concerned that something may give.

Navios experienced a disheartening 60% decline in net earnings, from $46.5 million in the second quarter to $18.7 million in the third quarter. The positive impact of Navios' ongoing fleet expansion was effectively offset by reduced available days from its charter-in operations. Bucking the pattern of declining charter rates set by competitors Diana Shipping (NYSE: DSX) and Genco Shipping & Trading (NYSE: GNK), however, Navios' average daily charter rate (TCE) climbed 2.2% during the quarter to $24,598.

Fools will keep busy tracking the pace of changes underway at Navios (this will help), let alone grasping the complex relationship between the company and its related publicly traded entities: Navios Maritime Partners (NYSE: NMM) and Navios Maritime Acquisition (NYSE: NNA). Just in the past few months, Navios Acquisition has acquired a fleet of seven VLCC oil tankers for $587 million, a pair of smaller "LR1" tankers, and a chemical tanker. Navios Holdings took delivery of three new Capesize dry bulk vessels, attached very long-term charter contracts to them, and promptly sold two of them to Navios Partners. Is your head spinning yet?

Navios Maritime Holdings still awaits delivery -- between now and 2013 -- of 18 vessels now under construction. How the stock performs through such an aggressive build-out will depend largely on continued success at locking in some of the industry's most attractive charter contracts. I still like the stock despite a debt load that raises my eyebrow, and provided investors understand how the risk vs. reward equation applies.