In his book, Mohnish Pabrai has discussed the cyclicality of shipping stocks, and how they might offer investors opportunities when times are tough. Last time we looked at this industry, however, it was in disarray. Companies had made purchase commitments for new ships, and so supply was going up, but demand had fallen drastically. Has anything changed in the last several months? The demand situation appears to have stabilized to some extent, with the Baltic Dry Index showing some increases from its lows. Unfortunately, many ordered ships are still on the way, as shipping companies loaded up on debt to order ships when times were good.
Value investors will often look to beaten down industries to find babies that have been thrown out with the bath water, and the shipping industry is certainly beaten down. Are there any gems to be found? Perhaps there are companies that didn't order a "boatload" of new ships, and therefore represent safe investments that can be had at a fraction of their long-term value?
To identify some companies that may be worth further investigation, consider the items that would be of interest to a value investor. First, the company should be conservatively capitalized, and therefore have a low D/E ratio. Secondly, the company should trade at an attractive level, preferably at a Price to Book ratio well below 1. Consider the chart below which shows the D/E and P/B ratios for some of the larger dry-bulk shippers:
The ones that look appealing at first glance are TBSI, ESEA and SBLK. Of course, this is only a first look at these companies, and digging much further into these companies would be necessary before making an investment. For example, this chart tells us nothing of the future commitments of these companies; if they have promised away large amounts of capital for new ships, the economic picture for these companies is not so bright (something we'll examine in a future post).
It's important to note that there are some other major differences between the companies that the chart doesn't recognize. For one thing, book value is an imperfect measure of a shipping company's fleet. The value of ships purchased will have changed depending on the type of ship and the time of purchase, and so fleets may not be comparable across companies on just their book values. Furthermore, some companies specialize in some commodities, and some companies operate in the spot market while other sign longer term contracts. Nevertheless, a screen such as this can be a good starting point in determining which companies are worth a closer look.