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A New York City-based company that transports iron ore, coal, grain, steel products and other drybulk cargoes along worldwide shipping routes.
Business: Genco Shipping & Trading owns a fleet of drybulk ships consisting of various sizes. As of the last annual report, GNK’s fleet consisted of 9 Capesize, 8 Panamax, 4 Supramax, 6 Handymax, and 8 Handysize drybulk carriers for 35 total ships. The ships are mostly under time charter contracts of various lengths that expire in a laddered fashion. These 35 ships have a total capacity of 2.8M dwt (dead weight tons).Many drybulk shippers have traded way below book value and have been considered potential value traps the entire time. There has been constant mention over the past few years of an oversupply of ships in the industry. Moreover, the BDI (Baltic Dry Index), which measures rates for drybulk shipping, is wildly volatile and goes up and down often, pumping up and dragging down the shipping stocks’ prices along with it. A decent strategy in 2009 was to rollercoaster shippers. I was in and out of ESEA, PRGN, and TBSI several times in 2009, most of the time for 5 to 15 percent gains. I became interested in GNK after hearing that the BDI had slumped for 31 straight days. That slump went on for 4 more days, falling an absurd 35 days in a row. Shippers, whether good or bad, were dragged in the mud this entire time. The recent shipping slump has created an excellent entry point to buy a shipping stock. At the time of my CAPS green thumb, GNK was trading at 4 times trailing earnings, which is ridiculous for a profitable company making moves to make more money in the future.Growth Strategy: GNK operates a fleet of relatively new ships compared to the industry average. As of the 2009 annual report, its ships had an average age of 7.2 years, compared to the industry average of 15 years. Its oldest ship was built in 1997, making it 13 years old. It’s pretty nice to consider that GNK’s oldest ships are still younger than the average age for the industry. For reference, the average lifespan of a ship is expected to be 25 years. That can be lengthened or shortened based on maintenance and modernizing practices, I’m sure.GNK has been acquiring new ships since its inception. Check out the growth of its fleet over the last 5 years:2005: 17 ships2006: 20 ships2007: 27 ships2008: 32 ships2009: 35 ships2010/2011: 53 shipsThe acquisitions of new ships have, however, caused long-term debt to balloon. For the most part, companies seem to use financing and capital market offerings to acquire new ships. Currently, GNK’s long-term debt as of the Q1 2010 balance sheet was $1.264B. That debt is almost entirely due to a line of credit from 2007 used to acquire 9 Capesize vessels, which are pretty large vessels. There is a plan in the works to acquire 18 more ships, 13 Supramax and 5 Handysize vessels. These ships will put the new capacity of the fleet at 3.8M dwt for about a 30% increase. The 13 Supramax vessels will be paid for using a combination of bank debt, senior note and equity offerings, and cash. I figure the 5 Handysize vessels will be paid for using bank debt and cash. 14 of the 18 new ships will be delivered in Q3 2010 and the rest will be delivered in 2011. The acquisitions should put the average age of the fleet at 6.2 years, down from 7.2 years. As far as industry oversupply goes, I don’t think GNK’s nice new ships will be vulnerable to being discontinued. Earnings Discussion:Here are the EPS numbers for 2005 through 2011:2005: $2.902006: $2.512007: $4.062008: $2.842009: $4.732010 (19 analysts’ avg. prediction): $4.272011 (19 analysts’ avg. prediction): $2.87As you can see, earnings have been positive and pretty strong for a sub-$20 stock. Before discussing the above numbers, let’s talk fleet utilization. As of 12/31/08, fleet utilization was 98.9%. As of 12/31/09, fleet utilization was 99.0%. As of 3/31/10, it was 99.6%. There are contracts set to expire from 2010 to 2012, but I’d say GNK is doing a rather fine job finding ways for its ships to make money. I’m not sure I expect such stellar utilization numbers going forward, but I believe it’s pretty safe to say GNK’s management is no slouch and utilization rates will not be falling off a cliff anytime soon. I’m sure it helps also that GNK’s ships are relatively new.I find it curious that analysts are expecting earnings to plunge so much in 2011. I’ve looked up estimates on other shippers and almost every other shipper is expected to increase earnings from 2010 to 2011. I saw that the low estimate for GNK in 2011 is $0.54. Based on the fact that the fleet will have 50% more ships, 30% more capacity, and an impressive track record of achieving high fleet utilization, I find it hard to believe the $0.54 estimate. I personally believe GNK’s numbers should be more in the $3.00 to $4.00 range in 2011. If GNK can continue to grow and keep fleet utilization high, I believe it can achieve $5 or more in EPS within 5 years. Financial Health:GNK makes plenty of money and has increasing long-term debt. $37.5M of the $1.264B is due in 2010 as of the Q1 2010 report, with most of the rest of the debt due in 3+ years. The company shouldn’t have problems making debt repayments as necessary as long as it makes money, which I see continuing.The dividend was cut as a result of a stipulation stemming from the 2007 credit facility that was used to purchase the 9 Capesize vessels. Certain financial criteria must be met before the dividend is reinstated. I’m guessing that once GNK is done purchasing ships at a rapid rate, it will start to make moves to pay down debt. Based on the size of its debt compared to its equity, I believe future dilutions may occur. Still, the P/E multiple assigned to GNK is alarmingly low and would still be acceptable even after a good amount of dilution.Based on its relatively new fleet and strong earnings numbers, I believe GNK is looking okay going forward.Risks:There are contracts expiring from 2010 to 2012. Also, 18 new vessels are being acquired and only 6 of those have long-term contracts attached. There’s always a risk that fleet utilization will go down. Analysts certainly seem to be forecasting a drop in EPS from 2010 to 2011 for GNK but not for other shippers.Debt levels are quite high. I wouldn’t be surprised to see a good bit of dilution in the future.I’m not convinced of an all-out recovery anytime soon, so shipping rates could remain flat or even crash (even despite recent events). Management tries to reduce the impact of short-term fluctuations, but that’s not always possible.Conclusion:I’ve seen that the market is quite short-sighted and will often bid a stock to lofty levels based on one or two good years. Based on the current situation, I believe that a company earning over $4 TTM and still making major moves to grow should not be valued under $20. Its stock is mispriced in the short-term, likely caused by the 35 day slump in the BDI. Longer term, an eventual recovery should see GNK exceeding the $4.73 EPS from 2009, especially with 30% more tonnage capacity in the future. If GNK can pull off $5 in full year earnings in 2012 or 2013 and the market assigns a multiple of only 7, that’s more than a double from current levels. Assigning a multiple of 7 to TTM earnings of $4.48 gives us a value of $31.36 per share. Three to five years from now, I expect a better economy than we have right now. I expect EPS to exceed $5 at that time. If people are more bullish then, a P/E multiple of 10 would see a price of $50 for GNK. That’s not unfathomable considering the high of $84.51 in May 2008 (more than 29 times 2008 earnings). I know that was during the commodity boom, but I’m only asking for a multiple of 10 instead of 29, which I believe is quite reasonable. A multiple of 12-15 is still not unthinkable and would put it in line for considerably more than a triple from the current level.I believe GNK is both a solid short-term and long-term play. Both profitable and unprofitable drybulk shippers have been slammed with the recent slump in the BDI. I expect a short-term bounce of 20% to 50% and a possible triple or more within 5 years. Management has done a good job with fleet utilization, achieving almost 100% as of Q1 2010. The growth is quite aggressive, but I believe the acquisitions will contribute nicely to future earnings as long as the debt level is contained.
Provides excellent insight into this shipping corporation. How do you think SHIP will fair?
Thank You. Own since 2/8/2010. Great company , exelent managment . My estimate - at the end of 2011 will start to pay divid. 1 more year and the P/E 10-12. Price 55-60$.
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 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. Thats a dangerous path in my opinion, with that much spent capital expenditures each month. 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
I am with you here at 15.82...Thanks for the research...
Please people remember me this stock when debt levels go down, but really down, I am interesting in it only if its debt levels down, if debt/equity ratio improves to .35 remember me buy some shares.
Not much has changed now that Q3 earnings are out, but I'll offer an update anyway since this is my highest rec'd pitch. I continue to believe the stock should be in the mid $20s in the short-term and much higher in the very long haul. The major catalysts include reinstatement of the dividend and major economic recovery. The recovery is quite slow, so the dividend is the more likely catalyst to occur. From what I gather, the financial covenant is tied to asset values of the ships and strength of cash flows and earnings. I don't see a major spike in the stock's price until the dividend comes back, and management still does not know when that will happen. I know I write a lot about dry bulk shippers on my blog, but I'm actually quite bearish on dry bulk shippers in general. There is major supply coming online and the future increases in coal and iron ore demand don't seem to be in line with the future ship supply increases. I only like GNK because I believe it's mispriced. The short-term recovery to the mid $20s may or may not happen in the next 6-12 months, but I strongly believe the stock will shoot up one day when the dividend is reinstated. I patiently hold until that happens. I remind you this may take anywhere from several quarters to several years. I have no idea what the exact covenants are, so any guess on my part is complete speculation. Management will likely continue to consider acquisitions if the prices of the ships are attractive enough. I know they just grew the fleet by over 30% on a dead weight tonnage basis, but it looks like Genco wants to continue to grow and acquire new ships in the medium-term. That may push back the dividend reinstatement further. Management is focusing on delevering in the short-term, but there's no saying whether they'll acquire more ships once they're pleased with the debt-to-capitalization ratio in the future. Management is opportunistic with ship purchases, so they'll likely pull the trigger again in the future if someone presents an attractive valuation on a group of ships. @JAcowboy: I don't really follow SHIP, but I'll offer a very quick opinion based on literally 3 minutes of looking at the fleet profile and the financial statements. It's trading at a large discount to book, but that's common with shippers these days and not necessarily inappropriate. The fleet looks about average, not too old and not too young. I don't like that earnings aren't really there. I see that non-cash charges against earnings, primarily depreciation, are dragging net income down. I don't see any cap ex in the cash flow statement for the last several years, so it seems SHIP isn't doing anything in the way of replacing or upgrading its fleet. I really only own GNK and BALT as far as dry bulk shippers go. I like GNK more than BALT, by the way. I'd sell BALT to raise cash for other investments if I needed to raise capital. I'll reiterate that I'm bearish on dry bulk shippers in general due to supply side fundamentals. @Speculatormaster: My guess is you won't get to buy the stock in the next 5 years. Part of why the stock is low is likely due to debt levels. If this company were the exact same except with much lower debt levels, it would probably be trading much higher before you got a chance to buy it.
Babo,Are you adding more shares of GNK at these levels or what are your thoughts?Thanks!
It looks like some big guys are playing against us. Goldman Sucks :) today release a report (Dry-Bulk Fleet Growth to Outpace Demand in 2011, Goldman Says) and as always the market is reacting on news. Well , the stock is almost 52 week low, new ships , great management , dividend at some time again, and even if the stock is beaten to 10$ I would consider it godsend.Don't let these sharks to doubt yourself. I think we will be rewarded for holding our ground.
Just thought I'd let you guys know: the dividend reinstatement can (but won't necessarily) happen when the market value of the recently purchased ships is at 130% or more of the value still owed by GNK on those ships. But remember, even when this requirement is met, the board may still chose to not reinstate it. However, i think they will as soon as they can, because management owns a fair amount of stock, and I am sure they want the dividends as much as we do. You can find the specific loan terms relating to the dividend, inside of the GNK 2009 10-K, under the "2007 Credit Facility" section.BTW, long on GNK.
I am chasing this dog into the rabbit hole...13.32 and more at 11.83...The wailing and gnashing of the teeth is in full effect!
First off, very insightful article. i personally am and have been extremely bearish on GNK for the past few months. I would tend to agree with much of what you've written except for your estimates on GNK earnings. If you look through their most recent SEC filings, you will notice that most of their rechartered ships are no longer time chartered but rather exposed directly to the spot market. One horrific case is with their Capesize ship that was chartered out at $6000, which would barely cover their operating costs ex D&A payments. obviously this is the worst of the bunch, however, the rest are not much better...chartered at spot or right above spot with the option to lock in a TC after a set period of time. what this ultimately means is that GNK will not be able to reach even a $3 FY EPS. I optimistically place their FY EPS at $1...if the shipping market rebounds. in the longer term, we know that capesize ships are still being delivered at an eye-popping rate. i believe 32 or 36 capesize ships were recently delivered. from this and other massive orders for ships placed years past that are now being delivered, dwt supply is increasing faster than demand. i believe JP Morgan cited demand increasing at ~9% and supply at ~11% (i believe those are the rough numbers off the top of my head). basic economics tells us that if the market is oversupplied, pricing will continue to soften. the only two real solutions to this are: 1) an increase in demand or 2) a decrease in supply addressing point 1. while i believe demand will maintain its current trajectory, an substantial increase in demand is unlikely since China, currently the sole reason for the demand growth, is facing higher levels of inflation. Responding to this would neccesitate cooling their economy....not pressing on the accelerator. significant demand growth therefore is probably unlikely. addressing point 2. scrapping has historically been the best way to cull the supply of ships. however, with many of the ships being relatively new...why would companies scrap them? especially when they took on so much debt to purchase them? here we look to older ships which are the most reasonable candidates to scrap. unfortunately, the operators of these older ships tend to be those shippers who didn't overleverage their books to boost their fleet size. even at these depressed shipping levels, these older ships are still turning a profit. so....those probably won't be scrapped. to make matters worse....supply will actually be EXPLODING upwards when vale takes delivery of their 30+ chinamax ships over the next few years, which will essentially displace 130+ capesize ships. ultimately, it boils down to supply and demand. although demand growth is high, supply growth is much higher. perhaps in 3+ years, the market will return to equilibrium, but in the meantime.....i would be careful being a bull in this space. when the austrialian floods are cleaned up and their weather stops being crazy, the bdi will probably rebound in the short term...but not by much for the reasons i've stated above.
http://fsin.weebly.com/ has also made an email on this stock, it covered a few key points including how this stock is 400% below its book value and the rise of the BDI.
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