leohath (< 20)

not a sinking ship

November 28, 2007 – Comments (3)

Past Present and future 

The Shipping sector has contained some of the best performing stocks this year with firms producing huge double and even triple digit performance figures at various times this year; this has in part been thanks to rising demand for raw materials.

 

Once again much of this demand has come from and will continue to come from the Chinese economy which is still amidst the stages of rapid expansion due to natural growth and rapid building projects to flaunt to the world in the coming 2008 Olympic Games.   

 With shipping the only way to economically import such volumes of raw material the Baltic Exchange Dry Index the key indicator of freight rates for commodities like coal, iron ore and grains has continued to hit new all time highs. The average price of chartering a big freighter to carry raw materials from Brazil to China has nearly tripled to $180,000 a day from $65,000 a year ago.  

Whilst the sub prime explosion seemed to hit all stocks regardless of their exposure to the crisis, this meant that shipping’s stocks rocketing growth was brought to a sudden halt and prices pulled back whilst the economy reassessed the sub prime damage. Shipping was further hit as Chinese steel makers drew down on their iron ore inventories whilst it renegotiated contracts with mining giants such as Rio Tinto (RTP) and BHP Billiton (BHP).

 

With no slow down in the Chinese building boom imports could only be halted for so long, and with negotiations coming to an end contracts with the shipping companies for the next few years are being signed.

 

Third quarter earnings were reported and on the whole showed Stella figures with firms such as Dry ships Inc (DRYS) revenue and earnings per share beating the streets estimates, some firms had a few hiccups but the sectors future looked rosy.

 However early November saw shipping stocks get hammered for reasons that have more to do with profit-taking than any major change in fundamentals or outlook.

With shipping stocks well above their long-term support levels this panicked momentum traders who know nothing about the business to sell. But ultimately investors with more knowledge about the real worth of the companies and the climate in which they operate step up and support the stocks and increase there holdings when such dips occur.

 

As Lazard Capital Markets analyst Urs Dur said "Companies with major mining commitments need capacity to move their cargoes to a very hungry China,”

"China saying that they are going to stop consuming iron ore is like America saying that they are going to stop consuming McDonald's hamburgers."

 

By all accounts not likely!

 

The Wall Street Journal noted in a recent article that shippers and commodity merchants "are braced for higher rates" next year and possibly through 2009, as shipyards are not able to build enough new freighters to relieve the shortage until around 2010. Keep in mind that there was little investment in this business for decades, so you don't just snap your fingers and produce a new fleet of boats.

 

With this in mind for those savvy investors out there the quite dramatic pull back in this sector for various reasons has left a large amount of these firms undervalued.

 

Given the outlook for the next few years and the fact that shipping rates are on the rise, a lot of the dry-bulk shipping companies are still cheap as they sport low P/E ratios, like cyclical stocks in midcycle. The peak of the cycle is likely a year away because there just aren't enough new ships coming into play to change the profit dynamics of this business.

 

Dry ships Inc (DRYS) one of the larger shippers seems to be fastest to react to the change in supply and demand and is throwing ships into the water whilst the market is still hot.

 

Those firms with newer fleets (information easily obtainable on shipper’s websites) will be better longer term investments but at present if it floats it has money making potential.

 With the whole sector a hot ‘Buy’ bear in mind the following stocks Dry Ships (DRYS), Eagle Dry bulk (EGLE), Excel Maritime (EXM), Genco Shipping & Trading (GNK), Paragon Shipping (PRGN) and Navios Maritime (NM).  Those who like a bit of security check out the dividends of a few of these stocks ranging from 1% to a massive 13% with solid growth potential it would seem shipping is a very attractive proposition. 

For those of you who can handle a little more risk try Oceanaut (OKN) a new blank cheque firm from the owners of Excel Maritime, the fleet will consist of two Capesize (deliverable in 2009), four Panamax and three Supramax dry-bulk carriers (deliverable in 2008) and initially will have the same management.