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Quick Genco Shipping Update

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September 29, 2010 – Comments (11) | RELATED TICKERS: GNK

My blog post pitching Genco Shipping was done before Q2 earnings came out, so the information was stale.  I've been keeping tabs on Genco since and I thought I'd give an update.  Most of this information can be found on their investor presentations, recent earnings calls, and press releases (except where I added my comments, of course).

As of 9/23/10, 13 of 18 ships from the two recent acquisitions had been received: 11 of 13 Supramax vessels and 2 of 5 Handysize vessels.  I expect higher revenues in Q3 on a sequential basis due to the number of ships now deployed. Genco's been receiving new ships since Q2 and will likely see higher revenues and costs until the rest of the fleet is delivered.

I've seen that a lot of ships being acquired were signed to below-market charters, so I don't expect anything crazy on the EPS front, since depreciation and amortization expenses will go up in step.  That seems to have happened in Q2.  Genco's management seems to be pretty good at handling the charters, so I expect at least decent charter rates going forward.  Genco's management has a goal of fixing 75% of ships to time charters.  When spot rates are bad, Genco ups the time charters.  When spot rates are good, they'll go with a lower percentage of time charters.

Similarly, Genco is opportunistic with ship purchases.  Going back to Q3 2009, I heard on earnings calls that Genco was looking to acquire ships.  Genco waited till June 2010, when it saw ships at what it thought were attractive prices.  Seems like common sense to buy at low or at least moderate prices, but I've seen many cases where management teams don't do that.

Analysts have been forecasting a decent drop in EPS from Q2, but I'm not entirely sure why.  Most of Genco's ships were already signed for charters through Q3, so revenues should remain fairly consistent.  Many in the dry bulk industry, Genco management included, have been forecasting better rates in Q4.  I do know that Genco management looks to fix some ships to longer-term charters in Q4.  If rates are indeed better, this should lead to slightly better EPS in Q4 2010 (depending on when in Q4 the rates were fixed) and definitely better EPS in Q1 2011.  That earnings release is likely in May 2011, so that's a while to wait.

Debt-to-capital is currently 62%.  Management views the mid 50s as a better range.  One short-term financial goal is likely to delever a bit.  I'm not aware of the specifics on the loan covenant keeping Genco from paying the dividend, but I know that another financial goal is to reinstate the dividend sooner rather than later.

Genco owns a 25.4% interest in Baltic Trading. It has received 7 of 9 vessels, with 2 more to come in Q4.  They will have 2 Capesize, 4 Supramax, and 3 Handysize vessels as of the end of the year.  The ships have an average of 1 year, so they're brand spanking new.  Peter Georgiopoulos and John Wobensmith of Genco management will also head up Baltic Trading.  On August 26th, Baltic Trading paid a dividend of $0.16 per share.  If BALT can get all of its 9 ships and employ decent charter strategies, Genco should benefit decently from the partial ownership.

Due to scarce bank capital, Genco's CFO John Wobensmith seems to think not all of the newly ordered ships will reach their destinations.  The ones that do will still add to an already large supply of dry bulk ships in the industry.  I haven't heard anything more on the scrapping front, but it doesn't seem like as many ships are being scrapped this year.  Ship supply is still likely to grow by more than ships will be scrapped.  Regarding the scarcity of bank capital, I'll have to dig around to see if that's true.

The BDI near the end of September 2010 is about where it was last year.

The steel industry drives a good amount of dry bulk trade due to iron ore and coking coal requirements.  The sense I get from US Steel, Nucor, and ArcelorMittal Q2 earnings calls is that Q3 is likely to be flat or unimpressive due to China's recent slowdown, European debt fears, and seasonal effects from a Summer slowdown.  Actually, I remember that was from Lakshmi Mittal's business update, but I don't see any reasons to expect any different from US Steel or Nucor.  It sounds like Q4 will be better than Q3.  Utilization is likely to be in the 75% to 80% range.

I intend to learn more about the global grain trade, but I don't have much useful to add at the moment.  The only major item I know is Russia's export ban and that the US and some others will likely be benefactors.  

I still believe Genco should be 20% to 50% higher, as I suggested in my pitch.  It would take major economic recovery for a sharp spike in share price, but I do believe it is cheap relative to other dry bulk shippers at this time.  Cash flows are strong and I see no major debt concerns since this modern fleet is likely to remain at high utilization rates.

11 Comments – Post Your Own

#1) On September 29, 2010 at 6:44 AM, JakilaTheHun (99.93) wrote:

Thanks for the update and write-up, BullishBabo!

 

Any thoughts on your chimpcontest pick, Eastman Kodak (EK), out of curiosity? Are there good fundamental reasons to like it, or is it just a high-beta pick?

I've been intrigued by it a few times over the past few years.  The balance sheet is ugly, but it's also one of those that offers high-reward potential. 

 

P.S.  I hope you stay rated as the top CAPS player, if for no other reason than that your quotes are much better (and more entertaining) than those from the previous inhabitants ;)

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#2) On September 29, 2010 at 9:18 AM, TMFBabo (100.00) wrote:

You're welcome.  Long time no chat. 

EK was a low PE stock trading at lows.  I did see that they lost money during 3 of the last 5 quarters, but I picked it anyway.  I screened for low PEs and made sure they were recently beaten down.  I figured that to win, I had to pick something with some upside as you mentioned.  I chose EK over MU in the end. 

I don't think it's a terrible pick right now, since it's been beaten down.  However, I see better stuff to buy out there.  I did end up picking it in my own CAPS portfolio though.

I'm glad you enjoy the quotes.  I usually have Futurama up there, but that Simpsons quote is a gem.

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#3) On September 29, 2010 at 10:53 AM, summitclark (23.55) wrote:

Any thoughts on SBLK, Star Bulk Carriers Corp also in the dry-bulk sector. Market cap aprox $175 million It is a smaller company, 11 total ships, 2 in construction. Seems far more conservative and far less leveraged than others in sector with net debt being south of 25% as of Q2 company reports.  SBLK also paying a small dvidend with permission of its creditors.  Also thoughts on day rates industry wide?

Thanks

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#4) On September 29, 2010 at 4:20 PM, TMFBabo (100.00) wrote:

If BALT can get all of its 9 ships and employ decent charter strategies, Genco should benefit decently from the partial ownership.

Yikes, let me clear this one up.  Baltic Trading will be employing spot contracts such as "Baltic Handysize Index + 10%" and such.  There's really no way to be too strategic about charters when your strategy is to go 100% with the spot charters.

@summitclark: SBLK has 2 old Capesize vessels, but they're receiving 2 new Capesize newbuildings.  The balance sheet looks good.  The income statement is a bit puzzling.  From Q3 2009 to Q2 2010, there are 4 straight quarters with unusual expenses.  They're enough to take EBIT (operating income) negative in 3 of the last 4 quarters.  I don't know the exact nature of the unusual expenses, but recurring "unusual" expenses? That's a possible red flag.  I haven't researched SBLK in depth, so it may be nothing.

If you want a low-debt shipper, I believe DSX is widely known as the most conservative.  It's quite solid all around; I just think GNK is trading at a very stupid trailing PE of under 4.  EXM's the only one that has a lower PE, but its ships are quite old and GNK's are new.

I don't follow the shipping rates too closely across the industry, but I do know that Capesize vessels seem to be recovering from the embarrassingly low $20k levels.  They should eventually continue somewhere above $30k, which is about where they are now.  I haven't heard anything extreme about the other ship types.

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#5) On September 29, 2010 at 5:14 PM, Valyooo (99.47) wrote:

That's funny, I was just thinking about your GNK pitch an hour ago and this is the first thing I see...nice write-up!

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#6) On September 29, 2010 at 8:05 PM, TMFBabo (100.00) wrote:

Boy, I'm on a roll today.  EXM's fleet is not that old.  In fact, a lot of it is new.  Its Panamaxes are starting to get up there and 3 of its Handymaxes are 20+ years old, but the fleet is only about 10 years old overall vs. industry avg. of 15.

@Valyooo: Thanks. As I expected, this post received way fewer recs than my other posts.  I still look at Genco's price and wonder why it isn't above $20, but I believe I'll be proven right in time.

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#7) On September 29, 2010 at 10:16 PM, summitclark (23.55) wrote:

Thanks for the response.  SBLK balance sheet seems to be clearing up, will look into the expense further. 

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#8) On October 01, 2010 at 9:58 PM, BearishKW (< 20) wrote:

Bullishbabo,

 

Do you think the lowered Q3 estimates mean that a certain amount more in debt is coming due?  (directly affecting EPS)  I'm a shareholder and am confused by the estimates as well.

 

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#9) On October 01, 2010 at 11:05 PM, TMFBabo (100.00) wrote:

@BearishKW: Working backwards to get to gross profit from net income on the income statement, you add back the ITDA of EBITDA and also G&A and R&D.  I don't see where G&A, R&D, Interest, Taxes, Depreciation, or Amortization would include debt repayments.  I think that would be more of a cash flow statement item, specifically CFF (Cash Flow from Financing.

My best guess is that analysts simply included lower numbers in general for shippers because Q1 and Q3 seem to be slower quarters in manufacturing and construction than Q2 and Q4.  That does seem to be the case with steel.  Since dry bulk shippers carry a lot of the raw materials for those sectors, I'm guessing they were simply forecasting fewer ton miles due to decreased demand for those raw materials.

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#10) On October 13, 2010 at 9:56 PM, G35Hokie (26.14) wrote:

Bullish,

Excellent write up as always. I have one concern about GNK that you may be able to clear up from what you have heard on the conference calls or found in research.
In your risks section (In the stock pitch) you mention they make plenty of cash, true. And their earning are high quality, Cash Flow from Op. > Net Income.

But I worry about the Free Cash Flow. Last quarter negative 150 mil, with negative 441 ttm. Only 208 million cash and equivalent on hand. It seems like a dangerous path in my opinion, with that much spent capital expenditures each quarter. Do you know how many quarters into the future we should expect to see such high expenditures? Also assuming this is the price of "our" new ships as we take delivery? Once again, thank you for your informative write ups that help many of us!

Regards,
G

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#11) On October 15, 2010 at 10:29 AM, TMFBabo (100.00) wrote:

Short-term, they want to delever a bit.  Long-term, I would bet that Genco would continue to make ship purchases as long as the price paid is good.  Genco's said for a while that it will continue to do that. 

There will be a combination of bank debt and dilution in the future as Genco looks to continue expanding.  As long as it can keep the ships chartered (over 99% utilization for the last many quarters), I don't have a problem with it.  Many other companies have ships laid up or unchartered and Genco seems to be one of the only ones to keep such a high utilization rate.

I agree it's scary, but I think of it this way: the best time to get really good prices on ships? Right now.  When the economy one day looks better, ship prices will be much higher and it'll be a bad time to buy ships.  If your plan is to expand big-time, you should probably buy ships now. 

Companies who need cash flows to turn from negative to positive to be able to make sorely needed acquisitions will have to wait till the economy is better and will receive unattractive purchase prices.  I know there's an oversupply of ships, but some companies sorely need more modern fleets.

My line of thinking does require Genco to keep its utilization rate high so that it continues to have accretive cash flows and EPS from all these acquisitions.  Whether Genco can keep all of its ships chartered is the biggest question mark.  My guess is that it can.

I haven't nailed down exact destinations for cap ex, but I believe it would be a combination of ship purchases, major maintenance items, and facility expansion.  I've seen tons of acquisitions in the past several years, so that's probably the majority of it.

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