Shipping Potential: To Follow Or Not To Follow Wilbur Ross?
There are signs that the global economy is continuing to struggle slowly towards a recovery.
It has been a series of two steps forward, one step back and may continue in that fashion for some time but it is ever so slowly getting better around the world. Europe showed some slight signs of improvement this past week and China released economic information that indicate growth is stabilizing in that very important economic region. Mexico raised its estimate of 2014 growth up to four percent on Friday.
The global economy is not great and probably doesn't even fit the definition of good but is getting better. This bods well for the recovery of one of the most damaged sectors of the economy. Conditions have been brutal for the shipping industry and the stock prices reflect that fact.
If it could go wrong, it did go wring for this industry. Leading up to the bust in 2007 shipping companies ordered too many new ships and capacity was far too high especially after the global economy came crashing to the ground. Lease rates collapsed as too many ship were competing for too little business.
Companies struggle dot service their debt and they saw share prices across the sector fell by 80 percent or so for most shipping companies. Shipping lenders such as Germany's Commerz Bank (OTC: CRZBY), took huge losses on their maritime lending portfolios.
We are starting to see the classic signs of impending recovery in the shipping industry. Several marginal operators have gone bankrupt in the past year. Older ships are being scrapped slowly but surely reducing industry capacity. Large private equity investors and distressed investors like Wilbur Ross, OakTree Capital and Blackstone are starting to make significant investments in shipping.
Commerz Bank reported that the portfolio of shipping loans is seeing better results and fewer defaults. It is barely the top of the first inning but the shipping industry is on the way to recovery and that could present a huge opportunity for patient investors who can tolerate high volatility.
Wilbur Ross is particularly bullish on shipping. He is worth listening to as his past ventures into trouble industries like steel, auto parts, Irish banks coal have been enormous success for investors who got in early. Mr. Ross has invested heavily in several shipping ventures and intends to increase his exposure.
He recently told interviewers at Bloomberg, “We're going to do a lot more in shipping even than we have “Shipping has a great oversupply of vessels that came from over-ordering a few years back. We think 2014 may be when it turns around.”
Several shipping stocks have already started to move higher this year but in a fashion that will be typical of the volatility in the sector we saw an opportunity created this week. StealthGas (NASDAQ: GASS) reported earnings that fell well short of analyst expectation and the stock plummeted by almost eight percent for the week.
The company is the only company that is trade on the US market that engages in the shipping of Liquefied Petroleum Gas products. They carry liquefied gasses such as propane, butane, butadiene, propylene as well refined petroleum products, such as gasoline, diesel, fuel oil, and jet fuel.
The fleet also carries edible oils and chemical around the world. The company currently has 33 LPG carriers; and three product tankers and one Aframax crude oil tanker.
StealthGas missed the highly accurate Wall Street Analyst expectations but they were profitable. In fact they have been profitable every year except 2009 since being formed in 2004. They actually saw revenues growth of about four percent year over year and much of the shortfall appears to have to do with dry docking a ship for maintenance sooner than anticipated.
StealthGas recently completed a $110 million equity offering and is using the money to continue to expand its LPG fleet in anticipation of increased demand in that segment of the market place.
The stock is incredibly cheap. The shares trade at less than 60 percent of tangible book value and the Price to Earnings ratio is just six. Unlike many shipping companies they are not straining their cash flow or increasing debt to pay out large dividends to shareholders.
As the economy slowly recovers demand of oil and gas products will increase and leasing and usage rates will climb steadily for the company. It can easily be seen why this stock would double (or more) over the next few years as the shipping industry begins to grow along with the global economy.
Like Mr. Ross and other distressed investors, it makes sense for long term deep value investors to consider increasing their exposure to the shipping sector.
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Posted in: Long Ideas