Taking Billionaire Wilbur Ross's Advice: Invest In Shippers

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Billionaire Wilbur Ross is a renowned debt investing expert who has turned bullish on the shipping industry; believing there are a number of opportunities in the dry bulk and container ship markets. Ross started his own firm in 2000, specializing in distressed investing (check out all the stocks Ross owns).

Private equity has also been showing interest in shipping. Major private equity firms have been buying up shipping vessels of late, including Blackstone's buy of nine refined-product tankers toward the end of 2012. Ross also snatched up a majority stake in Navigator Holdings, a shipping industry leader. While a number of stocks and industries might be considered economic bellwethers, one of the most overlooked is shipping. The slowdown in the global economy has decimated the shipping industry, where the Baltic Dry Index is down 75% over the last three years. 

Industry consolidation should help drive the industry higher. This will help better capitalize the industry and reduce its fragmentation. Part of what should help push the industry even higher will be a rebound in both the U.S. and global economies. Shipping still transports 90% of the world’s food, consumer and energy products, and assuming the world economy picks up, so should these shippers. Key products for spurring a rebound in the shipping industry will be agriculture, manufacturing and energy production.

The capital required to operate in the shipping industry is intense and the downward economic trends have been putting pressure on the companies to consolidate. Ross notes that the shipping business is…

…one of the most capital-intensive industries I know, and yet uniquely it’s highly fragmented. It has not become oligopolistic, despite being inherently global and capital-intensive. We think that will begin to change as we go through this extremely traumatic period that we’re in.

The industry. Shipping containers transport 200 times the volume that parcel carriers like FedEx or UPS. Also boding well for the industry is a rise in shipping rates, which includes a rise in the average spot rates -- including a 50% rise in rates year over year as of late 2012 from Hong Kong to Los Angeles. 

The Journal of Commerce sees capacity rising 10% in 2013, with the supply-demand balance breaking even in 2014. There is still room for the shipping industry to go higher, as charter rates were up 20% at the end of 2012 from their all-time 2009 lows, but they still remain 55% below their long-term 20-year average. The JOC projects U.S. import growth of 5.2% in 2013, and exports advancing 4.3%. IHS Global Insight also expects the shipping market to expand in 2013, forecasting market growth of 5% to 6% annually through 2015.

Some of the major shippers include DryShips (NASDAQ: DRYS)Box Ships (NYSE: TEU)International Shipholding Corp (NYSE: ISH)Costamare (NYSE: CMRE) and Kirby (NYSE: KEX).

Kirby is one of the top shippers, but is also one of the most expensive stocks: 

<table> <tbody> <tr> <td colspan="1" rowspan="1"><span> </span></td> <td colspan="1" rowspan="1"> <p><span><strong>Dryships</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Box Ships</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>International Shipholding</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Costamare</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Kirby Corp</strong></span></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><span><em>Price to Earnings (next year earnings)</em></span></p> </td> <td colspan="1" rowspan="1"> <p><span>--</span></p> </td> <td colspan="1" rowspan="1"> <p><span>6.1</span></p> </td> <td colspan="1" rowspan="1"> <p><span>8.2</span></p> </td> <td colspan="1" rowspan="1"> <p><span>10.6</span></p> </td> <td colspan="1" rowspan="1"> <p><span>15.8</span></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><span><em>Price to Sales</em></span></p> </td> <td colspan="1" rowspan="1"> <p><span>0.73</span></p> </td> <td colspan="1" rowspan="1"> <p><span>1.41</span></p> </td> <td colspan="1" rowspan="1"> <p><span>0.54</span></p> </td> <td colspan="1" rowspan="1"> <p><span>2.58</span></p> </td> <td colspan="1" rowspan="1"> <p><span>1.7</span></p> </td> </tr> </tbody> </table>

Two stocks paying a reasonable dividends are International Shipholding and Costamare, at a 5.4% dividend yield and 7%, respectively:  

<table> <tbody> <tr> <td colspan="1" rowspan="1"><span> </span></td> <td colspan="1" rowspan="1"> <p><span><strong>Dryships</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Box Ships</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>International Shipholding</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Costamare</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Kirby Corp</strong></span></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><span><em>Dividend Yield</em></span></p> </td> <td colspan="1" rowspan="1"> <p><span>--</span></p> </td> <td colspan="1" rowspan="1"> <p><span>15.80%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>5.40%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>7%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>--</span></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><span><em>Dividend Payout</em></span></p> </td> <td colspan="1" rowspan="1"> <p><span>--</span></p> </td> <td colspan="1" rowspan="1"> <p><span>132%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>74%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>82%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>--</span></p> </td> </tr> </tbody> </table>

Although Costamare's dividend is higher than International Shipholding, its other metrics, including valuation, do not shape up quite as nice. It appears that International Shipholding could be one of the best companies in the industry, paying an impressive dividend and still being relatively cheap. 

<table> <tbody> <tr> <td colspan="1" rowspan="1"><span> </span></td> <td colspan="1" rowspan="1"> <p><span><strong>Dryships</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Box Ships</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>International Shipholding</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Costamare</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Kirby Corp</strong></span></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><span><em>Return on Assets</em></span></p> </td> <td colspan="1" rowspan="1"> <p><span>-1.41%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>3.59%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>2.04%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>3.93%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>6.85%</span></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><span><em>Return on Equity</em></span></p> </td> <td colspan="1" rowspan="1"> <p><span>1.30%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>--</span></p> </td> <td colspan="1" rowspan="1"> <p><span>7.00%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>5.10%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>10.40%</span></p> </td> </tr> </tbody> </table>

Further pitting International Shipholding and Costamare against each other, we see the that International has a sustainable growth rate that is double (1.8%) that of Costamare's (0.9%). 

Other major shipper is Kirby, and with two of the top balance sheets, as measured by their debt to equity positions, it would appear International Shipping and Kirby could be top bets in the industry, or are they (see all the hedge funds that love Kirby)?

<table> <tbody> <tr> <td colspan="1" rowspan="1"><span> d</span></td> <td colspan="1" rowspan="1"> <p><span><strong>Dryships</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Box Ships</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>International Shipholding</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Costamare</strong></span></p> </td> <td colspan="1" rowspan="1"> <p><span><strong>Kirby Corp</strong></span></p> </td> </tr> <tr> <td colspan="1" rowspan="1"> <p><span><em>Debt to Equity</em></span></p> </td> <td colspan="1" rowspan="1"> <p><span>49%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>50%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>41%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>71%</span></p> </td> <td colspan="1" rowspan="1"> <p><span>26%</span></p> </td> </tr> </tbody> </table>

Kirby has been seeing pressure in its diesel engine segment. However, the shipper is looking to shift from manufacturing to "re"-manufacturing of hydraulic fracturing shale gas drilling equipment. As a result, investors might be best served investing in another shipper, given the slowing number of orders for hydraulic fracturing equipment. 

Dryships was dismissed pretty quickly since its valuation and returns (ROI & ROE) failed to impress. The company is also making the shift to ultra-deep water drilling rather than being a drybulk cargo operator. The acquisition of Ocean Rig further pushed it into the ultra-deep water drilling sector. Box Ships pays out one of the highest dividends in the market, but its dividend payment was cut by 25% in 2012 and could see further cuts given the payout in relation to earnings. 

Trusting in Ross' foresight of a rebound in the shipping industry, International Shipping could be well positioned for a turnaround. The company operates a fleet of U.S. and international flagged ships providing maritime transport services under medium- to long-term time contracts. The other kicker for the stock is its 5.4% dividend yield, and the company has $29.5 million in cash, where the annual dividend payment is only $7.2 million (see some of Ross' big selloffs).


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