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Several Christmases ago a family friend and I were talking stocks after the feast and she told me of the fantastic returns she was getting on her portfolio. Then she told me her holdings, almost 20 shipping stocks taking the lion's share. It was as though she had a shipping index ETF. Unfortunately, she hasn't had much reason to boast lately as the shipping stocks have gone south in a big way with several of her holdings now likely bankrupt and those titanic returns gone.
Shipping stocks have some basics that should be understood. They are mostly headquartered overseas, Greece overwhelmingly, many pay high yields (or at least used to), and they come in two flavors, tankers and dry bulk shippers. Both have seen significant declines as demand for the dry bulk commodities of iron ore, grain, fertilizer, and building materials ebbs and flows and for tankers the supply and demand for oil waxes and wanes.
It's a common mistake that the Baltic Dry Index moves rates when it is quite the other way around; charter rates make up the dry index and so are a leading economic indicator. The BDI is also partly impacted by the price of oil for fueling drybulkers and tankers.
Shippers, specifically dry bulk shippers, were all the rage several years ago and one, DryShips (NASDAQ: DRYS) , hit $110 a share only to trade this week at $1.55. After the precipitous drop in demand for dry bulk commodities, DryShips slashed its dividend and has yet to recover from its decline.
One that Jim Cramer perpetually praised was Nordic American Tankers (NYSE: NAT), which admittedly has done better than DryShips but this name was in the mid-$30s and now is trading around $8 a share. In general, most of the shippers are dependent on a thriving global and in particular a prosperous Chinese economy with increased demand for food, fertilizer, coal, and metals for building.
A Perfect Storm
A perfect storm of factors emerged after shipping rate highs of May 2008, including drying up of credit for debt to pay for future shipbuilding and required letters of credit to leave port as well as the sudden drop in commodity prices. Several shippers and shipping-related companies went bankrupt in the tight credit atmosphere including Overseas Shipholding Group, General Maritime, and Omega Navigation among others.
Navios Maritime Holdings (NYSE: NM) and its subsidiary Navios Maritime Partners LP (NYSE: NMM) have navigated the waters better than most. At the last earnings release President Ted Petrone estimated charter day rates to be much improved by 2014."Post restructuring agreement with our credit default insurance, Navios’ average charter out rate for its core fleet is $18,907 a day for 2012, $18,688 a day for 2013, and $30,343 a day for 2014. 98% of Navios’ fleet is chartered out for 2012, 33.7% for 2013, 10.6% for 2014." (from Seeking Alpha transcript). He also added in the call that Navios' vessel operating expenses are 23% less than the industry average.
Navios Maritime Partners has a 9.92 P/E and a 14.1% yield at a high payout ratio of 195%. Its parent, Navios Maritime Holdings, has a 12.24 P/E and a 7% yield at a somewhat more reasonable 83% ratio. Analysts expect a 16% growth rate for the next five years and managed to keep paying out its dividend throughout the worst of the storm. However, Navios Maritime Partners has the better margins and return on equity. I should also point out that Navios is headquartered in Greece and Greek shipping stocks are vulnerable to Greek debt news as well as Chinese economic news.
Are Tankers Tanking?
What about Nordic American Tankers? The crude oil tanker company now has a 14% yield and an EPS of -$1.14. Nordic American Tanker has paid its dividend for 61 consecutive quarters in good and bad times and has 20 vessels and only one kind of tanker, the double hull Suezmax, which can carry 1 million barrels of oil. Using just one kind of tanker streamlines operations. Nordic American Tanker charges spot rates instead of charter rates. Their breakeven rate is approximately $12,000 per day and the spot for 2012 is just slightly higher than that as discussed in their Q3 earnings release from Nov. 15.
In that same report a headwind mentioned for tankers going forward is the increasing reliance on shale and natural gas in the Americas, otherwise they expect much like Navios that rates should resume an upward trend starting in 2013.
Nordic American Tanker is also pursuing a very conservative policy of acquisitions as it keeps cash available to opportunistically snap up the ships of those companies that didn't make it through the credit and commodity storm.
Time to Jump on Board?
Like the airlines, ships have maintenance costs and the newer your fleet the better so Navios Maritime and Nordic American Tankers have been positioning themselves to better compete against companies like DryShips and Eagle Bulk Shipping . The problem remains, no matter how they shave costs and slow down to a certain knots per hour to conserve fuel or arrange for long-term debt tranches, etc., if the global economy changes they are at its mercy just as the old time Tall Ships were at the mercy of the prevailing winds.
There are much better dividend plays but I suppose if you have the soul of a gambler and a love for the sea, Navios and Nordic American are the better choices. Shippers are not the sure thing they used to be. Watch out for the icebergs.
leglamp has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!