This column was originally published on RealMoney on Nov. 14 at 8:00 a.m. EST. It's being republished as a bonus for TheStreet.com readers.
Dry-bulk ocean shipping companies were the
of the investment-banking world earlier this year, as several were brought public into an initial public offering market that turned out to be softer than expected. Most took the money and immediately headed south.
In late July,
I explained why I believed
would rebound, and it has come back by 45%. And now I believe the same happy fate may await
Genco Shipping and Trading
( GSTL), though it may not get there as quickly.
Genco, which currently sports about a third of the market capitalization of Diana, was the brainchild of Peter Georgiopoulos. If you've owned any of the oil tanker stocks, you may recognize that name, as he was the founder and chairman of
. That company went public at around $10 in 2001, promptly fell by 50% by late 2002, and then advanced tenfold to a high of $50.55 earlier this year.
Georgiopoulos, who spent the early part of his career with the junk bond kings of Drexel Burnham Lambert, saw the mom-and-pop oil tanker business -- which was out of favor at the time -- as one that was ripe for consolidation and business streamlining. His success at building a profitable, $1.4 billion company out of other companies' spare parts has become legendary. General Maritime now floats around 50 of its own tankers.
He's now aiming to do the same with Genco, and so far shares are following pretty much the same early path. The company went public at around $21, fell by around 30% and is now starting to rebound. The key to its success over the rest of this quarter, and next year, will be the rising demand of China and India for iron ore, coal and grain.
That may sound like a tired theme, but according to company executives and trade data, China's steel and energy demand growth continues to be a real phenomenon. Beijing-based China Economics and Business Monitor Group, for instance, offered this stat in a report Friday: By the end of 2004, the urban population of China had reached 540 million people, or 42% of the overall population, vs. 23.9% before the reforms of 1978.
That's an urban migration of historic proportions that has required a massive improvement of civic infrastructure and has generated enormous consumer demand. CEBM says that spending by urban residents now constitutes 60% of all spending in the country.
Dry-bulk shippers' primary role in the world economy today is to ship raw iron ore, coal and grain from Brazil, Australia, Indonesia and Africa to China so they can make steel for those roads, airports and factories, and feed a population that has left inefficient, undermanned farms behind.
The ships usually return empty. China may be a big country with a lot of resources, but the iron content of its native ore is inferior to the ore dug out of the ground elsewhere, its coal mines are inefficient and highly hazardous, and drought has impaired its crops. Researchers say it's cheaper for China to close down its dangerous coal mines and just float low-cost, high-energy boxes of rocks from Australia.
Georgiopoulos' strategy was to buy 16 relatively new ships from a Chinese fleet owner called Top Glory that the government essentially privatized. At the time, long-term charter rates were high, so he put 15 of them out on one- and two-year contracts to raw materials providers such as
. That proved to be a smart strategy, as rates are much lower now.
According to the company's chief financial officer, John Wobensmith, Genco has three Panamax-sized ships chartered out at $29,000 a day; the current rate is $20,000 a day. It has several Handymax-sized ships out at $26,500 a day; the current rate is around $19,000. The average age of Genco's fleet is eight years; the industry average is 16.
The advantage of high long-term charter rates is that it allowed the company to have a lot of visibility into its future earnings stream and build a dividend strategy accordingly. Some shippers have decided to pay out all free cash flow after interest as a dividend, while others target a percentage of cash flow. Genco has a hybrid approach, targeting a dividend rate of 54 cents per quarter -- that's about a 13.9% yield today -- while at the same time building up a cash reserve to help it buy new ships opportunistically.
The company also has a $450 million, 10-year revolving credit facility at Libor plus 95 basis points, which it can draw down for ship acquisitions. That allows Genco to finance growth without having to dilute shareholders by selling more shares. General Maritime used the same strategy, according to Wobensmith, allowing it to grow to a 47-ship fleet from 16 without issuing new shares.
Shipping companies add value by buying and financing more ships at good prices, and then chartering them out at high rates. Genco seems to have the management expertise to earn a good return on its invested capital in a period of overall growth for its industry. At relatively depressed prices, this may be a good time to ship out under this flag.
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Jon Markman, writer of TheStreet.com Value Investor, is the senior investment strategist and portfolio manager at Greenbook Investment Management, a division of Greenbook Financial Services. Separately, he is publisher of StockTactics Advisor, an independent weekly investment research service. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback;
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