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Wednesday, September 8, 2010

Container Shippers: The "Market" Warms to Sector on Solid Fundamentals; Buying More Seaspan and Global Ship Lease

Per our James Grant-Treasury Bonds are "Not Super Safe" post, we will soon follow-up with more on stocks versus bonds. (although we did subsequently relay research from Epoch Investment Partners that shows the "Ratio of equity free cash flow yields to bonds near 50 year highs"). Here, we briefly touch on the shipping sector, which we've also been meaning to come back to on CS$.

We continue to favor container shipping companies Seaspan (SSW) and Global Ship Lease (GSL) and recently added to our positions. In August, both companies posted results that again illustrate the inherent stability of their long-term oriented business models. For those interested, Seaspan presented at an investor conference today in NYC. The company's built-in growth and potential for dividend hikes are particularly compelling, in our view, and are under-appreciated by the Market.

Yet, mainstream media and Wall Street may finally be catching on, with CNBC featuring this story and video segment today:

The message is consistent with news we've been relaying for most of 2010, including this July post, Shipping News - Global Economy Better or Worse? You Be the Judge.

While some concerns remain around ship supply versus demand as the global fleet expands across virtually all shipping subsectors (thanks to the easy credit years) -- from dry bulk and containers to oil/chemical tankers -- Seaspan and Global Ship Lease are more insulated given long-term leasing models that are largely unexposed to the spot market (except as leases gradually expire in future years). Also, new capacity should be absorbed as emerging markets consumers continue to demand more goods and developed markets keep on consuming (even if slightly restrained from pre-recession levels). Of course, exports in both directions should also keep growing to feed this consumption. Don't forget that U.S. exports are growing Y/Y (up 26% Y/Y in June - please see Trading Economics for more) and Europe is also performing better than most people might suspect -- from our 8/11 Tweet:
  • UK: "the vol of exports increased in June to its highest level since Sept 08." U.K. Trade Gap Narrows More Than Ex http://on.wsj.com/aoRT5S
All in all, global commerce expands and our container ships should be there to transport the goods over the long haul (pun intended). In the case of Seaspan, the actual shippers are most major ocean liner companies, while for Global Ship Lease, the counterparty is CMA CGM. One note on the latter: we continue to expect CMA CGM to ultimately raise additional financing to allay debt fears. The carrier reported sharply better first half results just the other week. From the Journal of Commerce on 9/1/10:
  • French ocean carrier CMA CGM swung to a first half net profit of $864 million from a year earlier loss of $518 million on higher traffic volume and freight rates combined with lower costs.
  • The Marseilles-based carrier boosted revenue by 41 percent to $6.77 billion in the six months to June 30 from $4.8 billion in the same period in 2009.
  • Cargo volume jumped nearly 22 percent to 4.4 million 20-foot equivalent units from 3.6 million TEUs a year ago.
  • "The recovery in business that began to emerge in late 2009, gained further momentum during the first six months of 2010," the world's third largest ocean carrier said.
  • CMA CGM earned $1.05 billion before interest, taxes, depreciation and amortization compared with a year-earlier loss of $568 million.
Not too shabby.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL.

© 2010 Jeffrey Walkenhorst
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