As China shows early signs of economic stability, I wanted to focus on some beaten down stocks in the containership industry. Costamare (CMRE, Financial), which is one of the leading international owners of containerships, has seen its stock slide by 41% in the last year as economic concerns related to emerging markets have sustained.Â
As I mentioned above, China is showing some signs of economic recovery and the country’s manufacturing index has improved for the fifth straight month. If this trend continues in 2017, the implications will be positive for the containership industry, and the best time to accumulate the stocks is when sentiments still remain relatively depressed.
The business model for the containership industry allows relatively easy forecast, as containerships are leased to clients on medium to long-term contracts. Therefore, there is clear cash flow visibility barring scenarios where contracts are cancelled.
To put things into perspective, Costamare has current contracted order backlog of $1.68 billion, with quality clients such as Maersk and Cosco among others. This implies remaining time charter duration of 3.4 years and ensures that cash flows remain steady for Costamare in the foreseeable future.
Costamare declared common share dividend of 10 cents for the third quarter 2016, and this translates into an annualized dividend of 40 cents per share. At the current stock price of $5.60, the stock offers a healthy dividend yield of 7.1%. Even if there is no increase in dividend payout, the current dividend is sustainable considering the backlog.
On Nov. 28, Costamare was trading at $7.12 per share and the stock slumped to $5.60 by Dec. 2. The stock has been in a phase of consolidation in the last month. The reason for the sharp decline in the stock was the public offering of 12,000,000 shares of common stock at $6 per share on Nov. 29. The offering helped the company raise $72 million and boost its liquidity position to $172 million for the third quarter (pro-forma for common stock offering).
With Costamare having vessel deliveries in 2017 and 2018, strong liquidity coupled with buffer from cash flows and debt will ensure that financing of new vessels is not a concern in the next 12 to 24 months. Therefore, equity dilution might have taken the stock lower, but I see this as a good accumulation opportunity. Once the new vessels are operational, higher cash flows will translate into stock upside.
Costamare currently has total debt of $1.3 billion, which is not a matter of concern considering the fact that the current backlog of $1.68 billion will ensure smooth debt servicing. Further, the book value of the company’s vessels is $2 billion, which translates into loan-to-value of 65%, providing sufficient buffer for debt holders.
From an industry perspective, early sign of recovery in China is a positive that I have already mentioned. Besides that, the order book for new vessels is at historically low levels and as global economic activity improves, I expect the supply-demand factor to balance. This implies higher charter rates in the coming years.
Overall, Costamare has strong fundamentals and strong liquidity to finance new vessel deliveries. While equity dilution has depressed the stock in the near-term, I believe that the dilution factor will be more than offset by the growth factor, and the stock should trend higher in the next 12 to 24 months.
Disclosure: No positions in the stock.
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