It is rightly said that the best time to consider exposure to a quality stock is when industry sentiments are depressed. While timing the entry is also important, investors willing to buy and wait with patience can be rewarded handsomely. The containerships industry is among the industry that has been depressed in the recent past on the back of global economic weakness. This article discusses Costamare (CMRE, Financial), which is trading at attractive levels and can be considered for the medium to long term.
Costamare owns and charters containerships to liner companies worldwide. For the year to date, the stock has declined by 30% and I will elaborate the reasons why this deep correction is an excellent buying opportunity.
The first point worth mentioning is that the company’s business model involves long-term chartering of containerships that make the cash flow outlook relatively stable and firm.
Just to put things into perspective, Costamare has a revenue backlog of $1.7 billion as of July 2016. Considering the company’s annualized revenue for fiscal year 2016 ($480 million), the revenue visibility stands at 3.5 years. Therefore, with strong clients and clear cash flow visibility, the company is worth considering even when broad sentiments seem to be bearish.
Another important point to note here is that the company’s adjusted EBITDA margin was 68.2% in fiscal year 2013 and for 2016, the company’s adjusted EBITDA margin stands at 70.5%. In other words, even with weak industry sentiments, the company’s EBITDA has remained robust.
The next important stock upside trigger for Costamare is the fact that the company still has ten new containerships that are scheduled for delivery between 2016 and 2018. In May and June 2016, two containerships were delivered and both have been deployed on 10-year charters. In the coming quarters, as new containerships are delivered and commence operations, the company’s revenue and EBITDA will witness steady upside.
From the delivery of new containerships perspective, an important point to mention is that the order book for containerships is at historically low levels. Therefore, there are no significant concerns from a supply side perspective and if economic activity bounces back from current levels, the industry fundamentals can improve significantly. The overall industry sentiment has improved in the recent past, as indicated by a decline in idle fleet to 4.6% currently, as opposed to recent highs of nearly 7.0%.
Considering the company’s financial health, Costamare has total debt of $1.3 billion as of June 30. I don’t see debt as a concern considering the fact that Costamare reported adjusted EBITDA of $84 million for the second quarter. This translates into an annualized EBITDA of $320 million. Also considering an annualized finance cost of approximately $80 million, the EBITDA interest coverage ratio is comfortable and debt servicing is unlikely to be a concern in the coming quarters.
Further, for the six months ended June 30, Costamare reported operating cash flow of $120 million and this implies an annual cash flow of $240 million. With $100 million of cash in hand, other than potential cash flows in the coming quarters, I don’t see financing of new containerships as a concern. With a comfortable credit position, a mix of debt and internal cash flow, financing is likely.
In addition to these positives, Costamare currently pays a dividend of 40 cents per share and it translates into a dividend yield of 5.4%, which is attractive. With a strong order backlog, the dividend payout is sustainable. Overall, Costamare is well placed from a fundamental perspective and I see the deep correction in 2016 as a good opportunity to consider medium to long-term exposure to the stock.
Disclosure: No positions in the stock.
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