by Tim Melvin | August 8, 2013 12:45 pm
One of my favorite long-term sectors right now is the shipping industry. It has been decimated the last few years thanks to an oversupply of ships built in the boom leading up to the credit crisis. Lease rates plunged as economy activity slowed dramatically.
Now, though, the overcapacity is being worked off very slowly.
Still, most traditional investors are still avoiding the space. However, less traditional investors including well-known distressed investor Wilbur Ross and private equity firms like Blackstone and Apollo have made investments in the industry over the past year.
We have seen a few bankruptcies in the shipping sector and some older ships have been sent to the scrapyard, further decreasing the over capacity. According to Bloomberg, the 145 shipping companies listed in the U.S. markets have declined by more than 60% since 2008.
It’s a vulture’s paradise.
I have owned shares of Tsakos Energy Navigation (TNP) for some time now and, although they are a little higher than my original purchase price, they are still cheap enough to buy. The company is one of the largest shippers of petroleum and refined products in the world with a fleet of just under 50 operational vessels.
The fleet is well-diversified with crude carriers, refined-products tankers and liquid natural gas vessels. Plus, a good chunk of the vessels are operating on time charters with profit-sharing arrangements or long-term fixed rate contracts. In its latest earnings report, Tsakos said that current utilization rates were 98%, had already reached 74% for the rest of the year and 60% for 2014.
Plus, the stock trades at just 30% of tangible book value and has a dividend yield of just under 4%.
I also own shares of International Shipholding (ISH) and would be willing to buy more at the current price in spite of their excellent performance this year — eye-popping gains of 47%. The U.S.-based shipper was so depressed that even after that strong move in the stock, the shares trade at just 70% of tangible book value.
The company owns 50 vessels including several vessels that are flagged as Jones Act carriers and can transport cargo between domestic ports. The balance of the fleet includes container ships, auto carriers, tug barges and coal carriers. The stock pays a solid dividend that currently yields 4.1%.
I do not expect a smooth path to profits with my shipping stocks. The industry still faces substantial headwinds and each piece of bad economic news about the U.S. economy or turmoil in Europe is going to create volatility in the sensitive sector.
However, they are so cheap compared to their asset value that I have little doubt I will sell these shares sometime in the next decade at many times the price I am paying today.
As of this writing, Tim Melvin was long TNP and ISH.
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