Costamare (CMRE, Financial) owns and charters containerships to liner companies worldwide. From a year-to-date low of $6.23 on Jan. 20, Costamare has surged by 72% to current levels of $10.7. The upside is far from over for the stock and Costamare is worth holding for the next few years.
Costamare was trading at oversold levels and a 72% upside does not necessarily imply that the stock is overbought. To put things into perspective, Costamare is still trading at a TTM PE of 6.4 and forward PE (December 2017) of 7.0. Clearly, the stock is undervalued even after discounting the point that the containership industry growth is unlikely to be very robust.
The second important point to be bullish on Costamare is dividends and the view that robust dividends will sustain in the coming years. Costamare recently declared dividends for the 21st consecutive quarter without any reduction, and the company has also increased dividends by 16% in the last five years. With a dividend payout of $1.16 per share, the stock is certainly worth considering for dividend investors, and in the next six to 12 months, dividend will flow along with bright prospects of further capital appreciation through stock upside.
My rationale for believing that strong dividends will sustain for Costamare is the company’s business model that provides clear revenue visibility. Costamare charters containerships worldwide and these charters are for the long term. Therefore, there is a clear cash flow visibility coming from lease rentals. To put this in the form of numbers, Costamare has revenue visibility of $2 billion as of Jan. 27 and this will ensure that the EBITDA remains firm to service debt and for dividend payout.
Besides the revenue visibility factor, Costamare has five containerships of 14,000TEU that are scheduled for delivery between April and November. These containerships have secured pre-delivery financing and have been contracted for 10 years with Evergreen. Therefore, the company’s revenue, EBITDA and cash flow will increase in 2016. In addition to these 14,000TEU containerships, Costamare also has five 11,000TEU containerships that are scheduled for delivery between May and January 2017. The company is likely to witness steady growth this year and in 2017. This is likely to keep the stock momentum positive.
From a balance sheet perspective, Costamare has $1.3 billion in debt as of December 2015, but that’s not a point of worry in the coming years. With average charter term of four years, the company’s debt servicing is likely to remain smooth even with the delivery of new containerships that will increase leverage.
In conclusion, Costamare is worth holding for the next few years and I expect the company’s positive stock momentum to sustain in the foreseeable future. Further, the company has a solid track record for dividends, and that’s a big reason to invest in this stock with clear revenue visibility. While slow global growth is one potential risk factor along with increase in supply of containerships, I see fundamentals remaining strong on existing backlog and as emerging Asia recovers, there will be renewed demand upside.
Disclosure: No positions in the stock.
