Is It Time to Move Into Shipping?

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The Baltic Dry Index, a number issued daily by the London-based Baltic Exchange, provides an assessment of the price of moving major raw materials such as coal, iron ore and grains. The index measures 23 shipping routes on a time-charter basis covering Handysize, Supramax, Panamax, and Capesize drybulk carriers -- effectively, the index is a measure of activity in the shipping industry, which can be useful for investors who have holdings in shipping companies around the world.

Currently, the Baltic Dry is trading at 925, its highest level so far this year but still below its 52-week high of 1,162. This rise could signal a recovery in the global shipping market despite worries around the world of slowing economic activity.

Is this recovery superficial?

Market indices such as the Dow Jones industrial average and Baltic Dry are usually considered leading indicators, or an indication of what is going to happen rather than what is actually happening. So, are shipping companies actually making a recovery?

It would appear that there is a trend toward recovery in the shipping market. Kirby (NYSE: KEX), the leading barge operator in the US and also the largest shipping company in the shipping sector, has been slowly growing its earnings over the past years as shipping rates have risen.

<table> <thead> <tr><th> </th><th> <p>2013 Q1</p> </th><th> <p>2012 Q4</p> </th><th> <p>2012 Q3</p> </th><th> <p>2012 Q2</p> </th><th> <p>2012 Q1</p> </th></tr> </thead> <tbody> <tr> <td> <p>Revenue</p> </td> <td> <p>$558.78</p> </td> <td> <p>$512.55</p> </td> <td> <p>$521.32</p> </td> <td> <p>$511.85</p> </td> <td> <p>$566.93</p> </td> </tr> <tr> <td> <p>Net Income</p> </td> <td> <p>$56.58</p> </td> <td> <p>$57.89</p> </td> <td> <p>$53.05</p> </td> <td> <p>$47.55</p> </td> <td> <p>$50.94</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>$1</p> </td> <td> <p>$1.03</p> </td> <td> <p>$0.95</p> </td> <td> <p>$0.85</p> </td> <td> <p>$0.91</p> </td> </tr> <tr> <td> <p>EPS Indexed</p> </td> <td> <p>110</p> </td> <td> <p>113</p> </td> <td> <p>104</p> </td> <td> <p>93</p> </td> <td> <p>100</p> </td> </tr> </tbody> </table>

*Figures in $ US millions except per-share and index figures

Over the last five quarters, the company's earnings per share have expanded by a compounded 10%, indicating an improvement in shipping rates and activity.

In addition, Teekay (NYSE: TK), one of the world’s largest marine energy transportation, storage and production companies, is also registering an improvement in earnings.

<table> <thead> <tr><th> </th><th> <p>2013 Q1</p> </th><th> <p>2012 Q4</p> </th><th> <p>2012 Q3</p> </th><th> <p>2012 Q2</p> </th></tr> </thead> <tbody> <tr> <td> <p>Revenue</p> </td> <td> <p>$451.04</p> </td> <td> <p>$523.24</p> </td> <td> <p>$463.54</p> </td> <td> <p>$481.91</p> </td> </tr> <tr> <td> <p>Net Income</p> </td> <td> <p>-$6.14</p> </td> <td> <p>-$93.71</p> </td> <td> <p>-$20.26</p> </td> <td> <p>-$47.27</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>-$0.09</p> </td> <td> <p>-$1.35</p> </td> <td> <p>-$0.29</p> </td> <td> <p>-$0.68</p> </td> </tr> <tr> <td> <p>EPS Indexed</p> </td> <td> <p>756</p> </td> <td> <p>50</p> </td> <td> <p>234</p> </td> <td> <p>100</p> </td> </tr> </tbody> </table>

*Figures in $ US millions except per-share and index figures

Teekay has been returning to profitability during the last four quarters and its loss has shrunk from -$0.68 per share to -$0.09 per share, an improvement of 656%.

Furthermore, Golar LNG (NASDAQ: GLNG), one of the world's leading owners and operators of LNG transportation ships, has seen its earnings grow 389% during the last five quarters.

<table> <thead> <tr><th> </th><th> <p> 2013 Q1</p> </th><th> <p>2012 Q4</p> </th><th> <p>2012 Q3</p> </th><th> <p>2012 Q2</p> </th><th> <p>2012 Q1</p> </th></tr> </thead> <tbody> <tr> <td> <p>Revenue</p> </td> <td> <p>$35.12</p> </td> <td> <p>$99.16</p> </td> <td> <p>$121.13</p> </td> <td> <p>$106.99</p> </td> <td> <p>$83.07</p> </td> </tr> <tr> <td> <p>Net Income</p> </td> <td> <p>$85.56</p> </td> <td> <p>$875.99</p> </td> <td> <p>$44.73</p> </td> <td> <p>$35.42</p> </td> <td> <p>$15.18</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>$0.93</p> </td> <td> <p>$9.5</p> </td> <td> <p>$0.56</p> </td> <td> <p>$0.44</p> </td> <td> <p>$0.19</p> </td> </tr> <tr> <td> <p>EPS Indexed</p> </td> <td> <p>489</p> </td> <td> <p>5000</p> </td> <td> <p>295</p> </td> <td> <p>232</p> </td> <td> <p>100</p> </td> </tr> </tbody> </table>

*Figures in $ US millions except per-share and index figures

However, on of the key points that is displayed across all three of these companies is that while their earnings are indeed growing, their revenue is not, indicating that the shipping industry is not expanding as the Baltic Dry would indicate.

Stagnating revenue and rising earnings usually signify improving efficiencies on an individual company level, something that would not have an effect across the industry as a whole. Stagnating revenue means that sales are not growing.

Other trends in the industry

The three companies above are all growing their profit margins but do not seem to be growing revenues, so, as I have said, it is hard to establish from them if the shipping industry is actually in recovery mode.

Having said that, looking elsewhere appears to reveal an interesting trend.

Box Ships (NYSE: TEU) is an international shipping company specializing in the transportation of containers. The company owns container ships that transport empty containers around the world to where they are needed. A higher demand for the transport of containers could signify that a surge in goods being shipped is just around the corner.

<table> <thead> <tr><th> </th><th> <p>Q1 2013</p> </th><th> <p>Q4 2012</p> </th><th> <p>Q3 2012</p> </th><th> <p>Q2 2012</p> </th></tr> </thead> <tbody> <tr> <td> <p>Revenue</p> </td> <td> <p>$17.72</p> </td> <td> <p>$17.6</p> </td> <td> <p>$17.4</p> </td> <td> <p>$15.1</p> </td> </tr> <tr> <td> <p>Indexed</p> </td> <td> <p>117.4</p> </td> <td> <p>116.6</p> </td> <td> <p>115.2</p> </td> <td> <p>100</p> </td> </tr> <tr> <td> <p>Change</p> </td> <td> <p>0.68%</p> </td> <td> <p>1.15%</p> </td> <td> <p>15.23%</p> </td> <td> <p>0.00%</p> </td> </tr> </tbody> </table>

*Figures in $ US millions except for indexed numbers

Box Ships' revenue has been growing albeit slowly during the past five quarters. Revenue has expanded 17.4% overall, consistently, signifying an increasing demand for containers and their transportation. Box Ships' rising revenue and sales could signify that the shipping industry is gearing up for an increase in demand again.

Having said that, there is still insufficient evidence to suggest that the industry could be close to recovery

Conclusion

So overall, despite the rising Baltic Dry Index it would appear that the recovery in the shipping industry still has some way to go. That said, Box Ships is still growing and this could be a leading indicator for the industry as a whole.

Based on that, it looks as if the best investment for a play on the recovery in shipping is Box Ships. Furthermore, I believe that the rest of the shipping industry should be avoided until the industry starts to show some concrete signs of recovery and its overcapacity crisis is solved.

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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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