Featured MarEx Print Article: Upgrades+Downgrades
Featured print article from the Maritime Executive November/December 2010 Holland America Line edition.
Is It Safe to Go Back in the Water?
by Jack O'Connell
2009 was a difficult year for the economy. It was a banner year for investors. Like Dickens’ A Tale of Two Cities, “It was the best of times. It was the worst of times.” While the global economy tanked and unemployment skyrocketed, stock markets around the world soared. Investors who kept the faith and persevered through the March lows were amply rewarded – especially if they were smart enough to invest after the March lows (readers of this column were no doubt among the few who did). For the record, the Dow was up 19 percent in 2009, the S&P 500 22 percent, and the Nasdaq a whopping 44 percent – a stunning turnaround from 2008’s dismal performance, when markets dropped a combined 38 percent.
For shipping enthusiasts, alas, it was another year of disappointment. Despite sharp increases in oil and commodity prices (normally a good thing for companies that transport the stuff), shipping was among the stock market’s worst performing sectors. Capital Link Maritime Index (Jan. 1, 2009 – Jan. 8, 2010) As measured by the Capital Link Maritime Index, which tracks the 41 publicly listed U.S. maritime stocks, shipping equities barely broke even in 2009, rising just 0.3 percent (yes, that’s less than one percent). This marks the second consecutive year that these stocks have underperformed. Might as well put your money under a mattress or – better yet – into technology, which rose 63 percent on the year, or basic materials, up 62 percent.
Carnival Looks Like a Winner
There were some bright spots, however. Cruise companies were one of them. Carnival Corporation (NYSE : CCL ), parent of Holland America Line – featured on the cover of this edition of MarEx – saw a 30 percent increase in its stock price in 2009 and continued to pay an attractive dividend. It cut costs and lowered prices to keep its ships operating at close to full capacity. With 11 brands – including Carnival, Princess, Costa, Cunard and Holland America – and 91 ships, it is by far the biggest fish in the sea, carrying almost half of all global cruise passengers. Economies of scale are important in this business, and Carnival enjoys superior operating margins because of its size. It should continue to do well this year.
Royal Caribbean (NYSE : RCL ) is the other big player in the cruise industry. Its five brands – including Royal Caribbean, Celebrity and Azamara – and 38 ships carried roughly 25 percent of the world’s cruise passengers. Between them, Royal Caribbean and Carnival account for three-quarters of all cruise line traffic! RCL rose an impressive 84 percent in 2009, due in part to the launch of the world’s largest cruise ship, the Oasis of the Seas. The media splash created by this one vessel generated enormous passenger demand and enabled Royal Caribbean to charge a premium for tickets. It, too, should continue to do well as the economy improves and consumers feel better about themselves and their pocketbooks. Cruising remains one of the great bargains in the travel industry, and there is a huge untapped reserve of potential customers who have never taken a cruise. Another winner in 2009 was a company mentioned in these pages before – Aegean Marine Petroleum (NYSE: ANW), whose stock gained 62 percent last year and continued climbing in the new year. Aegean is an Athens-based bunkering company, selling marine fuel and lubricants from its fleet of double-hull vessels located in most of the world’s major ports, including Singapore, Rotterdam, Gibraltar and Piraeus. Like the ship chandlers of old, Aegean takes its services directly to customers, enabling them to refuel while at sea or anchored offshore. It is the biggest in the business and continues to acquire small mom-and-pop operations at an impressive rate, thereby spurring growth in sales and earnings. Unlike other shipping companies, which constantly worry over the price of bunker fuel, Aegean profits no matter what the price. It is an anomaly, albeit an attractive one, in the maritime industry, and deserves a close look.
Workboat Stocks Did Well Too
We talked about these companies in the last issue of MarEx, and they continue to outperform. Often overlooked, they are not even included – with the exceptions of Tidewater (NYSE: TDW) and Seacor (NYSE: CKH) – in most maritime or stock indexes. Instead they are lumped under the Oil Services category and play second fiddle to the big international drillers like Transocean (NYSE: RIG) and Nabors (NYSE: NBR). Yet they had a good year, in line with the market averages, with Hornbeck Offshore (NYSE: HOS) and Bourbon (GBB:FP) leading the way. Hornbeck, because of its focus on the Gulf of Mexico deepwater market, where activity and rates remain robust, rose 43 percent on the year, while Bourbon – the world’s number two player behind Tidewater and a dominant force in the lucrative West African market – gained 39 percent.
These results are not surprising when you consider that oil prices rose 78 percent on the year and continued to rise in 2010. They are surprising when you consider that the major oil companies slashed their exploration and production (E&P) spending by 15 percent last year. Yet the debate over Peak Oil continues, and companies are finding it increasingly difficult (and expensive) to replace depleted reserves. For this reason and others, the workboat companies prospered in 2009 as the search for new reserves – primarily in the inhospitable offshore and deepwater regions of the world – continued, and they look poised for additional gains in 2010. According to Barclay Capital’s global E&P survey, the most authoritative and comprehensive of its kind, spending in 2010 is projected to reach $439 billion, an 11 percent increase from last year. This bodes well for the workboat companies, whose earnings are almost entirely dependent on the level of spending by Big Oil.
The Rest of the Field
The traditional mainstays of the maritime world, tankers and bulkers, fared poorly. As measured by the Capital Link indexes, the stocks of these companies on average fell six percent and four percent, respectively. The world’s biggest tanker company, Frontline (NYSE: FRO), fell 11 percent; and the poster child for the dry bulk sector, Dry Ships (Nasdaq: DRYS), declined 45 percent on top of its 86 percent collapse in 2008 and now trades at around 6. Can you believe that this stock once sold for 130 and was seriously considering a three-for-one split? Dry-Ships exemplifies, more than any other company, the highly cyclical nature of the maritime business and the risks attendant upon investing therein. Even a well managed and conservative company like Tsakos Energy Navigation (NYSE: TNP) fell 20 percent in 2009 despite making money and paying an attractive dividend. Gives you pause for thought.
But it was not all darkness and gloom in the shipping world. Among the dry bulk companies, Navios Maritime (NYSE: NM) managed an impressive 92 percent year-over-year gain and Genco Shipping & Trading ((NYSE: GNK) was up 51 percent. On the tanker side, you had Teekay (NYSE: TK), which recorded an 18 percent gain.
Lessons Learned
To make money in shipping in 2009 you had to look outside the traditional tanker and dry bulk sectors or be an extremely good stock picker. Otherwise, you were better off sitting on your riches. The sectors that did do well, namely cruise lines and workboat companies, should continue to prosper in the year ahead as the global economy mends and economic growth resumes. It is also hard to see how tanker and dry bulk companies could suffer through another down year, given the steady rise in commodity prices and recent signs of reviving world trade. What is clear, based on the experience of the last two years, is that maritime stocks in a collapsing market – such as we had in 2008 – tend to fall faster and harder than almost everything else, and in a rising market – such as we had last year – they seem to recover more slowly. Only in a raging bull market, such as we had from 2002-2007, do they dramatically outperform.
One way to stay invested in shipping and avoid the pitfalls – and headaches –of picking individual stocks is through an exchange-traded fund, or ETF. ETFs have grown enormously in popularity of late and resemble mutual funds except they are even more focused, investing in specific industries or commodities or even countries. Want to invest in Turkey? There’s an ETF for you. And yes, there is also one for shipping. It’s called the Claymore/ Delta Global Shipping Index, and it trades under the convenient symbol of SEA. Designed to track the Delta Global Shipping Index, it launched in 2008 and had a 25 percent gain in 2009. As the name suggests, it is globally oriented and not limited to those companies that trade on U.S. exchanges, thereby giving investors access to shipping equities that trade on European and Middle Eastern bourses. SEA is also small cap-oriented, like the industry itself, providing the potential for outsize gains – or losses. If you’re thinking of going back in the water – on the theory that a rising tide lifts all boats – this might be a good way to do it.
Jack O’Connell is the Senior Editor of THE MARITIME EXECUTIVE. He is a private investor who may own shares in some of the companies mentioned in his columns. The views expressed in this column are his and his alone and are not in any way to be construed as investment advice. He can be reached with comments on this editorial at [email protected] and/or join the Maritime Executive ‘Linked In’ group by clicking HERE.