Tuesday, July 7, 2009

Water Transportation: Falling Knives

Many industries are represented in the Low P/E Bin, but water transportation has some stocks that are actually trading below bargain levels. Currently, there are two in the Bin: Frontline and Overseas Shipping Group. There were also four others that have recently fallen below Bin qualifications: Navios Maritime Holdings, Ship Finance International Ltd., Teekay Corp. and Tsakos Energy Navigation. Ship Finance and Tsakos' dividend yield have gotten well over 10%, pushing both out of the Bin. Navios fell out through its market cap shrinking below 500M, and Teekay got pushed out by declaring a huge loss in the fourth quarter of '08. It demonstrates one of the risks of buying foreign stocks: Teekay's $6.25/share 4Q '08 loss was announced less than two weeks ago, on June 30th.

Three of those ex-Bin shippers have gone beyond out-of-favor to outright turnarounds. Teekay's a speculation on its losses ending. Tsakos and Ship Finance, both of which are far more current in their reporting, haven't seen their earnings change into losses...as yet, perhaps.

Tsakos' results for 1Q '09 dropped 63% from the same quarter a year ago; its 12-month trailing P/E is 3.52. Its current ratio is 1.71, and its quick ratio is a very comfortable 1.45. Last year's cash flow from operations, net of capital expenditures, was about 1.63 times the dividend payout for the year. For 1Q '09, it was about 2.15 times, although the expansion of this ratio came because there was no capex spending for the quarter. Nevertheless, the elimination of capex for 1Q shows that the company places a high priority on paying the dividend. The 10-year average earnings of Tsakos is $2.68/share, giving a P/10YAE of 5.63. The chart for the stock looks awful; it's been on a steep downtrend since the beginning of June, which shows no sign of ending as of now. Tsakos pays a dividend only twice a year, so we won't know if the company's decided to (further) cut its dividend until about mid-September.

Ship Finance's chart also looks awful, but its downtrend started four weeks ago. Like Tsakos', its indicated yield is well above 11%. Unlike Tsakos, though, Ship Finance is running on a shoestring cash-wise. Its 1Q '09 net income fared far better that Tsakos' - down 29% with respect to 1Q '08 - and its cash flow from operations was down only 14% in the same timeframe. Its balance sheet, though, presents a scary picture. Its current liabilities are well below its current assets, and it's saddled with the necessity to pay back several short-term loans this and next year. For 1Q '09, it had to disinvest in order to meet loan committments and its dividend payment. The amount of the next dividend won't be announced until mid- to late-August. Like Taskos, Ship Finance has placed a high priority on paying its dividend; unlike Tsakos, though, its finances are presently squeezed to the bone. I should add that this company's a leasing company, so a positive cash flow from investing activities may amount to not making any expenditures. I should also add that it has not breached any covenants as of March 31st. It didn't sell any ships in 1Q '09, although it has postponed payments on five of them.

As noted above, Navios Maritime's market cap is well below the 500M minimum for the Low P/E Bin. Had its market cap been sufficient, though, it would have qualified. Its 12-month trailing P/E is 3.66, and its indicated dividend rate is 6.54%. Its net income for 1Q '09 was down 16% with respect to 1Q '08, and its cash flow from operations was actually up in that same timeframe. Operations cash flow dropped to -81.57 million in 3Q '09, but that drop to negative has been shrugged off in the two more recent quarters. Unlike the other two companies described above, it spent some funds on capex in 1Q '09 - more than in 1Q '08. If there are any bargains to be had, Navios is the company that'll snap them up. Its current ratio is 1.88, and its quick ratio is 1.72. Like Taskos, it has more than enough cash to meet all current liabilities. Its 8-year average earnings is $1.14, giving a P/8YAE ratio of 3.22.

All of these companies are in the same line of business: shipping, primarily oil-tanker shipping. With the exception of Teekay, which is sitting on a huge loss, all their 12-month trailing P/Es are in the low single digits. That says a lot about the market's anticipation of their earnings going forward. It could be that Teekay's disastrous results have put a cloud over all of them.

On a strict balance sheet basis, Tsakos and Navios are the best picks of the four that were discussed above. Ship Finance looks like an accident waiting to happen, and Teekay is an "avoid" even though cash flow from operations was more than enough to cover its dividends for '08. Earnings-wise, it's clearly the worst of the lot - even if it's the only one of two companies mentioned above that has not chopped, or even cut, its dividend in the last nine months. The other is Overseas Shipping Group.

I should repeat, though, that these companies are a lot like the proverbial falling knife. I had put several of them into my actively managed Marketocracy mock fund, and its performance has been hurt a little over the last few weeks on account of them.

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