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Shipping Potential: To Follow or Not to Follow Wilbur Ross?
Posted by: Tim Melvin (IP Logged)
Date: August 27, 2013 02:59PM

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 indicates growth is stabilizing in that very important economic region. Mexico raised its estimate of 2014 growth up to 4 percent on Friday.

The global economy is not great and probably doesn't even fit the definition of good, but it is getting better. This bodes 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 wrong 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 ships were competing for too little business.

Companies struggle to 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 troubled industries like steel, auto parts, Irish banks and coal have seen enormous success for investors who got in early. 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 (GASS) reported earnings that fell well short of analyst expectations, and the stock plummeted by almost 8 percent for the week.

The company is the only company that is traded on the U.S. market that engages in the shipping of liquefied petroleum gas products. They carry liquefied gasses such as propane, butane, butadiene and 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, three product tankers and one Aframax crude oil tanker.

StealthGas missed the highly accurate Wall Street analyst expectations, but it was profitable. In fact, they have been profitable every year except 2009 since being formed in 2004. It actually saw revenue growth of about 4 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 6. Unlike many shipping companies, it is not straining its cash flow or increasing debt to pay out large dividends to shareholders.

As the economy slowly recovers, demand for 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 Ross and other distressed investors, it makes sense for long-term deep-value investors to consider increasing their exposure to the shipping sector.



Guru Discussed: Wilbur Ross: Current Portfolio, Stock Picks
Stocks Discussed: CRZBY, GASS, OAK, BX,
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Re Shipping Potential To Follow or Not to Follow Wilbur Ross
Posted by: batbeer2 (IP Logged)
Date: August 27, 2013 04:20PM

Thanks for the idea. I'm a fan of Wilbur Ross.

Here's the fleet: [www.stealthgas.com]

- I reckon the average scrap value of those boats is 10m apiece for a value of $350m. That is half their stated book value.

- The replacement cost is roughly $20m apiece.... in line with book value of $700m (PP&E).

So it seems to me book value of GASS does indeed reflect economic value. They are not short of cash so no apparent liquidity issues.

Here's a report with some data points for the market/scrap value of similar ships.
[www.brs-paris.com]



Guru Discussed: Wilbur Ross: Current Portfolio, Stock Picks
Stocks Discussed: CRZBY, GASS, OAK, BX,
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Re Shipping Potential To Follow or Not to Follow Wilbur Ross
Posted by: LwC (IP Logged)
Date: August 27, 2013 04:52PM

A while back I posted a link to a Bloomberg article about Ross and Stealth that you might find interesting:

[www.gurufocus.com]




Guru Discussed: Wilbur Ross: Current Portfolio, Stock Picks
Stocks Discussed: CRZBY, GASS, OAK, BX,
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Re Shipping Potential To Follow or Not to Follow Wilbur Ross
Posted by: batbeer2 (IP Logged)
Date: August 28, 2013 12:55AM

Thanks vgm!


-EDIT-

Ehm.... Thanks LwC! My bad.



Guru Discussed: Wilbur Ross: Current Portfolio, Stock Picks
Stocks Discussed: CRZBY, GASS, OAK, BX,
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Re Shipping Potential To Follow or Not to Follow Wilbur Ross
Posted by: vgm (IP Logged)
Date: August 28, 2013 02:10AM

"Thanks vgm!"

Not guilty! Credit to LwC ;-)



Guru Discussed: Wilbur Ross: Current Portfolio, Stock Picks
Stocks Discussed: CRZBY, GASS, OAK, BX,
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Re Shipping Potential To Follow or Not to Follow Wilbur Ross
Posted by: vgm (IP Logged)
Date: August 28, 2013 04:28AM

The shipping industry is highly fragmented and multi-faceted. It's worth noting that Wilbur is being very selective in his shipping investments at present:

[www.businessweek.com]



Guru Discussed: Wilbur Ross: Current Portfolio, Stock Picks
Stocks Discussed: CRZBY, GASS, OAK, BX,
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Re Shipping Potential To Follow or Not to Follow Wilbur Ross
Posted by: Tim Melvin (IP Logged)
Date: August 29, 2013 08:24AM

"Thanks vgm!

-EDIT-

Ehm.... Thanks LwC! My bad."

Thanks for the link!

Definitely a fragmented/multi-faceted industry.




Guru Discussed: Wilbur Ross: Current Portfolio, Stock Picks
Stocks Discussed: CRZBY, GASS, OAK, BX,
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