Young and Invested

Ironically, the water transportation industry is practically drowning due to investors’ attitudes towards the stocks in this sector recently. Just for a speck of background information, dry water shippers transport heavy goods with huge ships that cannot be shipped by any other practical methods, including metals and other commodities. Along with the contribution of the down-market in the last few months and a global economic slow-down approaching, it’s not a wonder these stocks became so beat up. However, the extent to which confidence in the companies in this industry has been lowered is highly over exaggerated. For example, take a look at two particular stocks we have been following recently in their 1-year charts: Excel Maritime Carriers and DryShips:

Over the last year, EXM has lost about 87% of its entire stock value, while DRYS lost about 85% of its stock value. As I write this article, both stocks are trading at a mindblowing P/E ratio of about 1.45 times earnings and 0.86 times earnings, respectively. Why have these stocks become so undervalued? Mainly, it’s because the success of dry shippers rely on the demand of their customers’ contracts and because these company are usually heavily financed due to a large requirement of capital assets, particularly large water carriers.

However, from a practical point of view, there are two key life-saving buoys that people are forgetting about this industry. First, companies in the water transportation industry, or at least the ones operated with a management team of at least monkeys, sign long-term contracts with their customers for 5, 10, or even more years. These contracts, firstly, will result in a much more steady income than most investors expect because they are not so easy to break. If they would be, the conditions of the relationship would not have been made into a contract in the first place. If there is a condition to break them, it is very likely at a large unusual gain to the shipping company.

Secondly, water transportation is the only logical way that I can imagine businesses will continue shipping their steel, their potatoes, their oranges etc. Air transportation would never be used for this. So, unless we invest physical teleportation for the purposes of transporting these commodities, water transportation will continue being used in the next 5 year, in the 20 years, in the next 50 years and likely in the next 100 years.

Since the global economy will eventually turn around and people will remember that teleportation does not yet exist, we highly recommend a long-term position in these stocks. Just as a word of warning, DRYS is very heavily financed and may not be suitable for risk-averse investors; however, EXM is quite conservatively financed, has a solid debt-equity ratio and has just about enough cash to pay off all its due-on-demand bank debt. If you are looking for a shipper with a more conservative balance sheet, try Nordic American Tanker (NAT), which is trading about at 14 times earnings today.

Disclosure: this author owns positions in EXM and DRYS.

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