Shipping Companies Keep the Economy Moving

By Nihar Patel - October 23, 2012 | Tickers: CAP, SSW | 0 Comments

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When the Port of Oakland in California needed new cranes or container loaders, they were made in China. Theses steel titans were placed onto ships and began an arduous journey across the ocean. While this may sound like a roundabout way to get new gear, the point of the story is that shipping was the cheapest and most efficient way to get the new loading cranes.

Welcome to the globalized economy. Two investment opportunities present themselves in this anecdote. First, the physical transport, and second the storage container during transport.

Supplying the Vessels

Seaspan  (NYSE: SSW) is probably one of my all-time favorite stocks. Seaspan owns and manages container ships, and management had the foresight to negotiate nice long-term contracts, which allowed Seaspan to weather the decline in shipping volume and prices well. At the time it might have looked like losing the chance to benefit from higher prices later, but in this case conservatism paid off. Although the economy has continued to lag, I do not believe trade will be slow for much longer.

WIth a current ratio over 2, it is not likely that Seaspan won't be able to pay the bills or dividend soon. Management discussed in a recent earnings call how revenues have bounced back, and how cargo shipping is expected to increase at a steady clip of 8% in the near future. Despite offering a $1 dividend for 2012, Seaspan still has a over $360 million on hand.

It's important to note that as the company expands its fleet to handle the increase in trade, the new large vessels that Seaspan is acquiring cost less to operate than smaller ones. The bigger ships actually increase margin, because they bring in more revenue and do not proportionally increase costs. Careful expansion by the company is the key to its ability to consistently bring in cash and distribute it to shareholders.

Supplying the Boxes

CAI International  (NYSE: CAP) is another company that is a bit of a favorite, and I've only grown to like it more since it has been on a bit of a tear lately. CAI is a one stop shop of intermodal containers, with the company taking care of everything including leasing, selling, disposing, buying, brokering, and managing cargo containers. At the very basic level these containers are just metal boxes that the company leases out, so all CAI has to do is maintain them. It seems like the business could be one big cash machine if well-managed, especially while international trade is at full throttle.

The numbers seem to support my assumption of the very ATM-like nature of CAI. For the most part the company's profit margin is stable right under 40%, which is in line with other container companies. I will admit, the lack of a dividend and the low cash would concern me. Cash has also been historically very low, but the reason is that assets have been increasing at a very steady pace from about $380 million in June 2010 to $1.172 billion in June 2012. Debt is also rather high, with a debt-to-equity ratio above 2, but with a relatively stable income and assets that have a high value I am not too concerned. The correlation of an explosion in total assets with long-term debt makes me think that CAI is rapidly expanding to put itself on the forefront of a resurgence in international trade and shipping. That is a smart move, because I think 2013 will be a good year economically, even if the job market lags a bit.

Conclusion

I think both of these companies are fairly solid investments. There are concerns about the macroeconomic climate, and the mess that is Europe dragging everything down. But as the economy improves, and more specifically as consumerism returns to the western world, I am sure these stocks will benefit greatly.

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