Seaspan (NYSE: SSW) noted in its latest earnings conference call that it expects container trade to increase by 7% for 2013. For a company that provides the ships to transport those containers, that is a great projection. Coupled with other macroeconomic factors global shipping of all varieties seem poised for a nice year. They probably warrant going a bit heavier on those companies a group than other sectors.
Volume and Prices are Set to Increase
Seaspan has two major factors affecting its business. First, is the volume of trade that is done globally. For Seaspan that is specific to container-based trade. Second, is the price of the charters.
The ships are so expensive. If the only way to increase the income stream is to get more and more ships it would place a lot of pressure on the bottom line. Even if top line revenue grew with the new ships all the debt required to expand the fleet would eat into earnings, and more importantly return value to shareholders.
Seaspan has two traits. Growing its fleet is the first. Growing the fleet is the same as saying, Seaspan wants to be bigger. In the last earnings call, management talked about orders or purchases of a total of 13 more ships of various types to be delivered at certain times between now and 2015. The company already has 69 ships plying the seas, and has another 13 announced in the last quarter.
Growing the dividend is the second. I am not really a fan of buybacks, though they do have their place. Seaspan has done some buybacks, but it remains dedicated to its dividend. Seaspan announced a 25% increase in its dividend for 1Q2013.
Seaspan had net income ttm of $86 million with an EPS TTM of 0.27. The company has posted losses in the past. Seaspan has had inconsistent results in the past, and you should understand that if you are considering a position. Since I believe the future will look better than the past, I am less concerned. Container traffic for 2013 is expected to grow.
Alternatively a Company That Has Many Kinds of Ships
I had narrow criteria when looking for a competitor to Seaspan, and it was tough finding a good one. I went with Ship Finance International (NYSE: SFL). It took a while to find out with this company does. It owns many different kind of ships from supply vessels to oil tankers and even container ships. It does different things with each ship type. The company is expanding its fleet slower than Seaspan. It has 1 ship for 2013, and 4 ships for 2014.
Ship Finance has 46% net margins, which is fantastic. I would infer that the company uses its fleet well. One of the most important things about this company is its 9.59% dividend. This is a dividend play. I would not worry too much about capital appreciation.
There is a looming concern for the company that deserves ongoing attention just in case. Ship Finance was spun off from Frontline and that company is still the number one customer of the company. Frontline charters oil tankers from Ship Finance. Frontline has some problems of stemming from too much oil shipping capacity. It is pushing down rates and leaving ships without purpose. Frontline will have problems meeting its obligations without a restructuring if the macro-environment does not improve in the next few years.
The company has been hit by shrinking revenues since 2008, and revenue growth only recently returned. This problem with Frontline places a dark cloud over the resurgence in growth, and I am do not know the trend can continue. The problem won’t be terminal until 2015, and management has time to deal with it.
Considering Ship Finance’s debt-to-equity of 2.035, losing a major customer or seeing it contract may make it difficult for the company to meet its own obligations. Management things it can either work through or work around the problems
Containerization For Diversity
It is probably a good idea to get varied when exposing yourself to shipping. The two companies here have the ships that ply the sea lanes. CAI International (NYSE: CAP) owns and manages the containers that carry a lot of the world’s good. Read about the history of the intermodal container, because it is interesting.
CAI has growing revenues and earnings, but I expect that to accelerate. The global economy is still a bit anemic. CAI could see better rates on its boxes in the future. The company does not have a dividend, but its cash position remains at a low $17 million despite regular positive earnings. Looking at the total assets you can see that the company is growing at a steady clip.
Despite the recent run on CAI, I think it can continue a bit further in the near-term, because with a PE of 9.7 it is valued slightly lower than peers like TAL International, which is around 11. I think CAI will catch up to peers, even though they have been appreciating. I chose CAI over peers because it is smaller, and I think it will have an easier time growing.
Concluding Thoughts
I really like Seaspan and it has served me well overall, but it is not exactly consistent. I really like it, but understand the ups and downs the company has experienced before considering a position.
Ship Line has the same concern regarding the future. Its biggest customer might be a question mark, and the company might see a contraction in earnings. The dividend is almost 10% though, and if the company can resolve its issues then it really recommends Ship Line for a long-term hold.
CAI is something to mix in for a bit of diversity. I discuss containers in more detail for other articles, but CAI is my favorite of the bunch. It is a capital appreciation stock investment though. There is no dividend as of yet, and it is smaller. While I tend to like smaller companies, you might prefer something larger and with more stability. So be aware of the risks involved with a company like CAI.
Additional Riffing:
I do not know how many times I have said the global economy will improve. It will, and global trade is not going away. Seaspan will benefit when Europe gets its act together. You can’t write off the region. However, long it takes it will one day do something that helps it recover.
It is almost a guaranteed but hidden benefit to Seaspan. Trade flows between Asia and Europe are shrinking, but what will happen when they rise. Seaspan is increasing its fleet, but it won’t take delivery of those ships in a while. I think, though this is just my opinion, that those ships will be ready to go as global trade is in an upswing. It will make Seaspan’s revenue increase substantially, since I think there will be upward price pressures as a recovery really gets underway.
The same cannot be said for Ship Finance. That company has a lot of oil carriers and similar ships. The problem with that is most countries are trying to kick the oil habits. A lot of the U.S. production is domestic now. Oil tankers might play a smaller role. Crude is liquid at room temperature. It is just amazing at all the properties of oil that make it easy to utilize and transport. It is still one of the densest sources of energy that is easy to transport. Contrast that to natural gas, which is a gas at room temperature and pressure. Crude oil’s ease of use really makes the modern world possible.
Now we are moving post-oil, but can you imagine what we would have done if we didn’t have something like crude oil? It is energy dense, liquid, stable in atmospheric conditions. The importance of it being liquid is significant. Pipelines are a very efficient form of transport. Barges require rivers, and trucks are versatile but use a lot of energy per ton transported. Mass transport of solid objects is a bit more complex than liquid. Oil tankers have almost a perfectly balanced load, and even when the cargo shift it tends to stay evenly balanced somewhere else. Solids do damage to other solids. For a great fictional story about transporting something unreasonably huge read The Ice Limit.
The point I am making is that these oil tankers cannot be easily converted to carry CNG or LNG. Even if they could, maintenance costs would go up. With LNG you cannot have a leak or a temperature issue. If the cooling system just breaks in rough seas you are out of luck. That does not mean you can’t transport them, but it costs more. CNG requires high pressures. You better not spring a leak. The same is true for oil, but it is easier making something “water” (or oil) tight generally, than having to make it completely pressurized.
Conversion of the tankers if possible would be expensive, and the maintenance costs will go up. That is especially true of conversions over ships designed that way from the start. Building something custom will always be superior to improvising something. Ship Finance has done a good job of diversifying its revenue, but more might be required. It might have to separate more from Frontline and considering it is getting a dry-bulk carrier in 2013 and 4 container carriers in 2014, it is not going for more oil tankers. That was a rather obvious statement, but it is a good sign.
CAI has containers and has been doing awesome lately. I think it will benefit as the economy improves. Prices and volumes will go up. That is it. The intermodal container is not going obsolete.
Author’s Note: This is what Additional Riffing is all about!
The post Cargo Companies Set to Grow as Global Trade Rebounds appeared first on The Market Archive.