Please excuse me if I describe the past week as a stormy sea, because that is not just a tired cliche for the marine shipping stocks. Many freight-toting companies with low valuations and great prospects have had the wind knocked out of them as momentum traders dove for the exit hatch.
Among the heavily discounted stocks this week that you may wish to consider is the fast-growing containership powerhouse
, which reported great earnings two weeks ago and has suffered no end of abuse ever since. Unless I'm really missing something, investors whose horizon stretches beyond their noses should start positions around here.
Seaspan is en route to become one of the largest owners of container ships in the world. It has a very modern fleet now of 29 ships in operation, 34 more on order and coming soon, and it plans to have at least 100 in five years.
In the past quarter it hit some impressive milestones, completing a highly accretive $1.5 billion acquisition of eight new ships that are the largest available, and at the same time nailing down 10-year leases for all of them with one of the world's largest carriers (which was not named, but quite possibly the Chinese-owned
The company also increased every important metric -- total contracted revenue, earnings and assets -- at around 35% annualized in the quarter. Just to give you an idea of where this is going, earnings before interest, taxes, depreciation and amortization is expected to grow by more than threefold to $500 million by 2011 from $145 million.
Financing Locked Down
To prepare itself for that kind of growth, Seaspan took on $1.5 billion in debt and equity financing during the quarter at attractive terms, even as the famed credit crunch was raging. That's a good measure of the company's financial strength and credibility. And at the same time, it announced a 6.4% dividend increase.
To be a little more specific, distributable earnings rose by 81% and 74% to $30 million and $82 million for the third quarter and for the trailing nine-month periods respectively. The payout ratios for those two spans were 86.5% and 84%, which is a lot. It's like owning a company that is so confident of its success that it has long-term plans to send you almost 90% of its earnings every three months.
One little thing that may have needlessly worried investors about Seaspan's results was the "paper" loss that it showed. Companies that use a derivative called swaps to fix their interest rates over the long term must adhere to accounting rules that require them to record rate changes on their books. In the third quarter, Seaspan posted a $54 million noncash charge for that reason.
The loss reported has no real financial impact and makes no reflection on the economic stability of the company. It's just a way of keeping track of swaps. Chief financial officer Sai Chu offers the analogy of a homeowner who has a fixed-interest-rate mortgage and might for some reason be required to record a gain or loss on his mortgage every quarter if rates go up or down. The owner's choice to fix rates for his mortgage would have been the same regardless of the volatility of rates, and he never realizes any actual cash gain or loss -- so the accounting of the position is meaningless.
When I spoke to Chu last week after the quarter, he was in South Korea checking on the building of Seaspan's latest ships, while company founder and chief executive Gerry Wang was in Beijing dealing with customers there. They both wanted to emphasize that because of the company's financial strength and growing dominance in the industry, it is poised to be the beneficiary of any instances in which rivals might have to pull out of new-building plans because of shaky economic conditions elsewhere.
In other words, if a Greek or Norwegian container ship owner needs to pare back on plans for buying new ships, Seaspan is one of the few companies that has the financial strength available to step in and take over their place in the shipbuilding queue. As a result, it could very well exceed its goal of getting to 100 ships in the next few years.
A Tight Ship
Seaspan has been remarkably disciplined in its approach to growth. A company that was less focused on the long term would go for short-term contracts that pay more in charter rates now but would not lock in cash flow for 10 years. A less disciplined lessor would also charter out to smaller, less credible counterparties who would pay more -- but would not offer the long-term security of a major carrier. And a less disciplined firm might rush into acquisitions, picking up smaller industry players in an effort to grow faster.
Seaspan has eschewed that approach because it does not want to change the successful culture of its firm or take on any ships not designed by its team for maximum interchangeability and ease of maintenance.
In short, while SSW does pay a 5.5% dividend yield, it should not be looked upon as merely an income vehicle. It is also a growth company. Right now it is trading at around a 12 times multiple, but considering its locked-down prospects, its balance-sheet wherewithal and long-term focus of management, it could easily merit a multiple closer to 18.
Sure, it's in a cyclical industry, but not many cyclical companies can say that they expect to grow 30% for at least the next five years, virtually without fail. (Its contracts have no escape clause.)
Although the company is dependent to some degree on Chinese strength, Wang is not worried about a decline in business there. He noted that when he was visiting Shanghai last week, the five-star hotels and restaurants are no longer only frequented by foreign businessmen. They're now filled with local businessmen, as wealth creation and demand for consumer goods have grown immensely. Although the U.S. may be suffering a slowdown, in other words, that is not happening in China or in most of the rest of the world.
So consider taking advantage of the recent dip in SSW, with an 18-month target in the mid-$40s. The advantage of buying here is that we'll know very quickly if we're wrong. A close below $25, which was last year's breakout level, would lead me to believe I'm missing something seriously wrong at the company. Set a protective stop around there.
Last week I wrote about another shipping stock -- Oceanaut
( OKN). Check out the
At the time of publication, Markman was long Seaspan, although positions may change at any time.
Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. He also writes a regular column for
MSN Money. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;
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