This Global Shipping Giant Delivers
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The business of moving goods from point A to point B is critical to global trade. Investors can do very well investing in one of the many links of the value chain. We all know that Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) has chosen railroads as his value creator. Personally, I’m a big fan of port and toll road infrastructure owner Brookfield Infrastructure (NYSE: BIP).
Before you can get the goods into Brookfield’s ports or unto Berkshire’s railroads you need to get them across those big blue basins of water. The most cost effective way to get job done is by putting a shipment on a cargo ship. Believe it or not, it would take hundreds of freight aircraft and miles of rail cars to do the job of just one container ship. Due to their size and efficiency it is estimated that 90% of international trade is done via containerships. With the emergence of Asia as a global hub for trade, transporting goods in and out of Asia and having a relationship with Asian shippers is a key competitive strength. Therein lies just part of a thesis for an investment in Seaspan (NYSE: SSW) and their heavy involvement in shipping goods from the production centers of Asia to the consumptions centers that span the globe.
As the owner of containerships that are on long term fixed rate charters, Seaspan doesn’t have the operational risk nor are they plagued by the whims of the volatile global economy to the degree of the operating companies they lease to. Think of them as a floating REIT where they rent out their ships and sit back and collect the checks. This makes their revenue fairly stable and gives them the ability to send a consistent and growing dividend to shareholders.
While Seaspan isn’t the only company operating as a floating REIT, I think they are the best. Danaos Corporation (NYSE: DAC) for example rivals Seaspan in size with 64 containerships. They however are more of a deleveraging story at the moment whereas Seaspan has their balance sheet pretty much squared away and has become a yield story. Then there is Costamare (NYSE: CMRE) with their soon to be fleet of 57 vessels which is a much smaller fleet in terms of ship size as the biggest ship in their fleet is 9469 TEU. Seaspan and Danaos both have massive 13,100 TEU containerships in their newer fleets. When you combine Seaspan’s long-term fixed rate charters, younger fleet of larger ships and their Asia centered connections and they stand out above these peers.
As the company recently reported earnings, let’s take a quick look under the hull and see how they did. Going into the report, analysts were expecting Seaspan to grow revenues by 25% to $167.1 million and earnings by 29.2% to $0.31 a share. Revenue missed slightly as it came in at $166.3 million but they beat EPS handily at $0.35 a share. They’ve been steadily growing earnings as their new ships have hit the water, over the past year earnings have risen from $0.24 a share up to the current $0.35 a share.
One of the highlights if you want to call it that was their accepting delivery of two more new builds in the quarter. This brings their fleet up to 69 vessels and these latest additions mark the end of their eight vessel 13,100 TEU new build program. They don’t have any more deliveries scheduled until 2014. However, with their current new build program complete, we should see their focus shift more toward that dividend.
They are currently paying out $23 million dollars a quarter to their shareholders but they have over $75 million available each quarter that could be distributed. Further, they have a total of $338.3 million of cash on the balance sheet to go against $4.47 billion of debt and other liabilities. Mix this with their minimal capital expenditures of just $80 million planned over the next year and a half without any debt maturities until 2015 and it’s a recipe for increasing that payout.
While their debt might look worrisome on first glance, consider that they have $6.8 billion dollars of long-term fixed rate contracted revenues with an average term of seven years. Once they finish their last three new builds in 2014 they’ll generate $540 million dollars in EBITDA and as their contracts come up for renewal they’ll be facing more favorable charter rates going forward thanks to increased demand from shippers as well as increased freight rates. That leaves ample dollars for paying down debt as it begins to mature.
To sum it up, you’ve got a company just about to enter their peak cash flow generation years with highly visible revenues into the future and no near term debt maturities. This means but one thing, they have a lot of room to increase the dividend and as the dividend goes up so will the price of the shares. That’s one reason why I have been trying to add shares to my virtual “No Drip, No Mess” Portfolio. For that portfolio we’ve written puts that expire in a couple of weeks. Seeing that the shares are trading nicely above our strike price we’ll probably not get our shares. That’s ok, if at first you don’t succeed, try, and try again. While smart investors like Warren Buffett and the team at Brookfield will do exceptionally well owning their links of the value chain you still have to get the goods onto their systems, containership owners like Seaspan have what it takes to deliver the goods.
latimerburned owns shares of seaspan and Berkshire Hathaway. The Motley Fool owns shares of Brookfield Infrastructure Partners, Berkshire Hathaway, and Seaspan. Motley Fool newsletter services recommend Berkshire Hathaway, Brookfield Infrastructure Partners, and FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.