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Baltic Trading Profile

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch
Managed by the same people of Genco Shipping [(NYSE: GNK)]. After receiving two more ships in Q4 2010, Baltic Trading will possess 9 ships built in 2009 and 2010 consisting of 2 Capesize, 4 Supramax, and 3 Handysize vessels. Baltic Trading obtained equity financing to purchase these ships, along with a $75M addition from Genco.

What you get, then, is a no-debt shipper with an entirely new fleet. Here's how it all went down: Baltic Trading used IPO proceeds and Genco's additional paid-in capital to buy ships at good prices. My purchase price of $10.95 is 21.8% below the IPO price. Since the assets consist entirely of the new ships, I'm getting a further discount on an already attractively priced fleet.

While the balance sheet contains no debt right now, Baltic Trading does have access to a revolving credit facility of $100M. It will likely be tapped in order to pay for one of the remaining two ships.

When I look for a shipping play, I look for (1) age of fleet, (2) debt levels, (3) profitability, and (4) valuation. I think Baltic Trading fits the bill. Let's examine more closely:

1. Age of fleet: The fleet is new.
2. Debt levels: There is no debt currently, although a small amount may be forthcoming.
3. Profitability: I've seen the way Genco manages its ships, and they are skilled in managing vessel operating expenses. With a new fleet, I'm certain that Baltic Trading will operate above break-even for a long time. A new fleet and no debt lead to low maintenance costs and non-existent interest expenses.
4. Valuation: As I said above, the ships were purchased at a good price and you get a further discount from the IPO price.

I expect earnings to be much lumpier than Genco's earnings, since Baltic Trading intends to spot charter its entire fleet. Many have called Genco a leveraged play on the BDI, but I disagree. They employ 75% time charters, sometimes going higher when spot rates are suffering.

Baltic Trading is the true pure play on the BDI. I realize major economic recovery could take years, but I'm content collecting the $0.16 quarterly dividend, which works out to a 5.84% yield on my basis price. Major economic recovery will see a soaring BDI, which in turn will see Baltic Trading trade at a much higher price.

I've thought about the oversupply condition a bit, and I think it will play out OK. For a little while, there will be too much supply and shippers will suffer. Scrapping is entirely an economic decision. As the shippers suffer because they aren't getting good charter rates, they will look at all their new ships and wonder why they're carrying all their old ships and paying operating expenses. I believe scrapping will be accelerated at that time. I'm sure supply will still be high, but not as high as forecasts predict. The shippers can then use the proceeds to pay down some of the debts that were used to finance the new ship purchases. Using the proceeds to buy more ships would probably be dumb, given the oversupply.

I purchased Baltic Trading in real life as well at about the same price. I intend to patiently wait until the BDI soars one day many years later. I am happy with my purchase price and I believe I'll collect a good annualized return, helped by the 5.8% yield and eventual capital gain.

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