ValueSlant (55.30)

Shipping and Value Investing: Can’t We All Just Get Along?

June 03, 2011 – Comments (1) | RELATED TICKERS: NNA

Post Source Here:  http://valueslant.com/2011/06/03/shipping-value-investing-cant-all-just-get-along/

Can investing in a shipper be justified as a value investment?

The crude, product, and dry bulk segments of the shipping industry remain very depressed, and are among the few sectors to not rebound strongly the past two years.

The shipping industry sells a commodity service,  employs tons of financial leverage, and is hyper-cyclical and super capital intensive. (You can find a nice concise overview of the industry in this recent interview with a shipping banker (h/t Frank Voisin). So suffice it to say that shipping doesn’t exactly sound like the ideal business.

On the other hand, for investors with a longer term view it seems like one could play the cyclicality in shipping. Right now the industry is faced with a large oversupply of ships (and more expected to be delivered over the next year or two) and rates are abysmal. But demand is holding up (and it is safe to say there will always be a need for shipping oil and other commodities) and the laws of economics tell us the oversupply will correct itself over some period of time.

The market appears to be valuing many shippers on trough earnings. As longer term investors can we take advantage of that?

At capitalistcollective.com, “ExtraFertile” pitched the dry bulker SafeBulkers (SB) as a buy. Hedge fund manager Aram Fuchs responded:

Warren Buffet has a good rule that he uses to give himself discipline:  He says he only buys a stock that he would be happy to own if “Mr. Market” never gave an option to sell it.

This forces Buffett to look at long-term earnings power rather than short-term cyclically volatile earnings.

Would you want to own Safe Bulkers if you could never sell it?

Mr. Fuchs appears to be referring to this piece from Buffett’s 1987 Letter to Shareholders:

Whenever Charlie and I buy common stocks for Berkshire… we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate…

Our approach makes an active trading market useful, since it periodically presents us with mouth-watering opportunities. But by no means is it essential: a prolonged suspension of trading in the securities we hold would not bother us any more than does the lack of daily quotations on [our subsidiary companies that do not trade on the stock exchange].

I would not want to own any shipper if I could never sell it. I would be nervous if I had to rely on a shipper for steady cash flow. But is “only own if you would never sell” always the correct standard? There are very, very few businesses, if any, which meet that criterion. It limits one to buying companies with a virtually impenetrable moat that can compound capital at an abnormally high rate indefinitely. That is great investing discipline, but the problem is that the identity of those select companies is usually well known and they rarely go on sale.

If I know that a shipper is selling below intrinsic value, and the stock market will provide me with an opportunity to sell at or above intrinsic value once rates turn around, then can that not be a value investment? (Of course assuming the balance sheet is strong enough to survive a protracted downturn etc.)

What do you think?

(Okay, here is the part where I tell you I am not arguing against Warren Buffett. I think Buffett has come around to this approach at Berkshire based on the amount and nature of the capital he is managing. He certainly didn’t manage the early Buffett Partnership exactly along these lines.)

Assuming you are willing to consider investing in a shipper, I will leave you with a name to look at.

Navios Maritime Acquisition (NNA) – NNA is the latest addition to the Navios shipping empire, set up to build a product tanker fleet. They started as a SPAC and only launched operations in the past year. I like the strategy. NNA ordered product ships at cyclical low prices. Then they bought a fleet of crude tankers in operation with above market charters to lock in cash flows. Those cash flows and attractive long term debt financing provide a runway for product rates to turn around as their product tankers hit the water over the next two years. The market seems to be valuing the stock on the assumption that rates will remain where they are forever. Given that NNA has a long financing runway there might not be a lot of downside unless you are very bearish on rates for the long term (beyond two to three years). Timing might be an issue here as it could very well be two years before rates start to turn. It might be too early to jump in. I will continue to follow NNA (I don’t currently own any shares).

Let me know in the comments what you think.

Post Source Here:  http://valueslant.com/2011/06/03/shipping-value-investing-cant-all-just-get-along/