Danaos Corp (DAC)

Cheap, but lots of debt. Still, this company is at a great price. I've scored twice on DAC; they're worth a third try.

I found Danaos using a low PEG screen that has outperformed the S&P 500 by 15% per year since January 2001. Danaos is yet another shipper trading well below book value. The company has a lot of debt but I believe it is likely to survive the current recession. As long as this company survives, its stock price is likely to triple.

Valuation, Improving economy

Solid financials in difficult economic climate, especially in shipping. Upwards potential is great when economic growth kicks in.

Screen: 50% above 52 week low; 50% below 52 week high; 4-5 stars. Also, shippers should rise faster than the S & P with real economic recovery.

Aggressive amount of debt but one of the pound for pound best in the industry. Will be a diamond again.

Shipping will come back as the economy gets moving. This company has a significant insider investment. Greeks have been in the shipping industry for thousands of years and will continue. The company continues to expand adding ships even during the down turn in the economy.

Mmm...shipping...

Anyone else getting these rough numbers? And please do correct if you spot any flawed methodology.

Everyone has been more than antsy the past few days about Zim Integrated Shipping Services' news that it's unilaterally cutting its long term charter-hire payments by 35% effective Sep 1, 2009. Per DAC's 2nd quarter '09 and Half-Year Earnings Report, released on July 27th, 2009, these ships have increased operating revenue for the 6 months ending 6/30/09 by $10.6 mil to a total of $154.4 mil.

The addition of these six ZIM ships also increased operating expenses by $3.5 mil to $45.9 mil for the same 6 months.

Now, not all of the ships were in operation for all 6 of those months due to their delivery dates (p. 2 on 2nd quarter earnings report). Of the past total 36 months of possible use (6 ships x 6 months), the delivery dates were such that these ships were only in operation for a total of 21 of those 36 months.

Taking this 21/36 ratio (.583), we can say that the $10.6 mil revenue increase contributed by these ships for the 6 months is only 58.3% of their full potential. Therefore, $18,182,000 is my rough estimate of what these ships would be bringing in for revenue, which translates into $3 mil revenue per ship per 6 months. (Same method can be applied to expenses, $6 mil full expense potential for 6 months for all 6 ships)

So if we factor in the 35% payment reduction attributed to ZIM, then we'd reduce our operating revenue to just shy of $2 mil per ship per 6 months operation. Expenses would stay the same, however, at $1 mil per ship per 6 months).

Though 35% is no small percentage, it appears that DAC will at least still be able to cover its operating expenses on these ships.

Also, DAC is taking delivery of 3 new ships in the 4th quarter '09 (2 Post-Panamax and 1 Panamax) and 4 new ships in the 1st quarter of '10. (4 Post-Panamax) that will result in an additional 42,400 TEU of carrying capacity, or more than 25% of the 165,933 TEU currently represented by the fleet (of which the ZIM vessels are included in that figure). Nevermind the 21 ships in addition to that which will be delivered between the 2nd quarter of '10 and 2012.

Yes, DAC has some issues to work out with the increases in its average debt and subsequent interest expense increases. These are no small matters, but given the continual effort by HSH Nordbank, Aegean Baltic and others to secure and extend DAC's waivers I think they are in a position where it is imperative they let DAC work out its debt troubles through continued, efficient and still profitable operation rather than put a financial vice on the entire business, thereby seizing all future cash flows.

Recently reduced rates by 35%

PE ratio around 5.

With the long term profitable shipping contracts they've got, this stock is dramatically less risky than other shipping stocks, but is similarly cheap as hell. The main risks here are 1) they won't be able to get loan covenant waivers for the required debt to asset value requirements, 2) they won't be able to find funding for their newbuilds. Given that their existing ships are extremely profitable, I don't see a bank forcing them into liquidation when it knows it won't get paid if they force liquidation, but they will get paid if they don't force liquidation. Further, given that the newbuilds are on profitable extremely long term contracts, I don't see why they won't be able to find funding for ship completion before the required dates.

Sure there's a little risk here, but all the other shipping companies have huge risks associated with "will shipping prices go back up before our existing contracts expire". Whereas DAC, if you ask the same question, the answer is "check back with us in 10 years because right now it just doesn't matter".

As the world economy picks up, transportation (shipping) demands will increase. DAC has borrowed a lot of money to place themselves in a position to capture more globalization effects.

from yahoo

Thanks BravoBevo

Following kaskoosek with this one.

This stock has nowhere else to go but up... or down... but I'm hoping for up. That way, we all make money and can buy family packs of twizzlers without feeling guilty.

To understand why DAC is a solid long-term buy at today's prices, you have to understand why they are this low in the first place:

- DAC has chartered a huge # of new vessel construction. They will expand their fleet by about 50% in the coming 3 years
- To finance all this construction, they must take on a mountain of debt. Currently they owe about $1b and have to take on about $2b more
- This is the worst time in a long time to attempt to borrow money. The credit markets are very tight. As of now, DAC only has certain funding for about $500m of that $2b. That means they need another $500m by the beginning of '10 and another $1b by the beginning of '11 to meet their commitments. That's a steep hill to climb.
- To make things worse, shipping rates are currently in the toilet.... all this construction made a lot of sense when rates were 4-8x higher than they are today.
- Now that shipping rates are ridiculously low, that means the value of vessels are similarly low.
- Low vessel value means DAC is in breach of most of its loan covenants. That means they have to pay higher interest rates to get waivers from their lenders.
- Also because of their covenant breaches & tight lending they had to cut their dividends. That made all the dividend investors bail out.
- Furthermore, those higher interest rates are biting into their profitability

Look grim, right? Which is why the stock is at such a low p/e ratio. Now let's look at the upside:

- Either demand for shipping will increase, or competitors will go out of business. Either way, rates must go up. In fact, CONTEX rates finally flattened out over the last 2 months, and last week was the first real increase in over a year. This is the end of the trough for shipping rates.
- As rates stay stable & rise, the value of vessels will rise. This will eventually put DAC but within its covenants & lower its interest charges
- In the meantime, all these new boats are already chartered on long-term charters, with large solid counterparties. So DACs income will steadily rise despite its higher interest costs.
- DAC doesn't need the money to complete its build program for months/years down the road. So even though waiting to make the loan commitments makes the future look uncertain, it also means they can probably negotiate better rates as the credit markets loosen up in the coming months/years.
- Also the cancelled dividends are giving them $100m/year in free cash flow to apply against construction. Although only 10% of what they need, it helps a lot.
- It's not a matter of "can" they borrow the money, but for "how much" ... DAC is flowing so much cash they can afford the higher rates to guarantee they get the loans.
- Once the money to complete the build program is secured, the dividend can be re-instated. The dividend investors will come back to the stock.

So ultimately, an investor today has to be patient for 3 things to happen:
1) shipping rates to return to sustainable levels
2) capex funding to be secured
3) dividend to be re-instated.

This will take approx. 2 more years, but expect significant gains in the stock price as each of these 3 events occurs.

beaten down and no one cares about debt anymore...obviously

Looks way too beaten down... though may be dead money for a while. The 2 billion in long-term debt hasn't scared off many of CAPS' best bulls, and even GMX gave it a vote of confidence at one point.

Outperform from here seems likely.