First time posting here and fully expect lots to venom from the crowd who researches their investments about as much a 1st grader researches a science project…. The only reason for posting now is a bit of goodwill at the Holiday time to those that helped me learn the industry and perhaps contribute my own bit of knowledge the “pool”.
I’ve been following shipping for nearly 4 years now, which is an infant in the scope of Audio, but I’ve taken the time to absorb knowledge from him and others such as Pepit and Investech to name a few, as well as spend countless hours on the publics sites which provide priceless info if you take the time to digest it. I believe in the investing research along the lines of “50 ft wide and a mile deep” and have made fair coin over the years.
The research over the last few months has been focused on Genco, which I like as a company and respect their management. However, having said that, they (and the whole drybulk shipping industry) are about to enter the horse latitudes (do you own research on that term and draw your own analogies).
From a macro industry perspective, the massive orderbook supply will far outweigh commodity shipping demand growth, depressing charter rates for at least 3-5 years. From a micro, Genco standpoint, an aggressive acquisition strategy has built up a debt service load that will weigh them down for years. Even their creative venture in BALT, which I applaud, will only marginally help offset the impending crisis
Now to the specifics, built on a model which factors in everything from individual ship period and spot charters, expirations, broker commissions, maintanence expenses, G&A, Interest expenses, swaps, & so on….. Genco will post fully diluted EPS of $0.96 +/- $0.02, for Q4 . Looking ahead based on macro factors and FFA trends, they will be lucky to post EPS of $2.00 in 2011, $0.50 in 2012 and break even in 2013 & 2014. All numbers are well below street estimates. I don’t claim to have a magic crystal ball, but I use facts readily available to those who expend the effort.
Those that have recently posted their “amazement” at Genco’s current PE ratio should consider that if I’m correct, the 2011 EPS of $2 at an historical drybulk shipping PE of 6.5 translates to a stock price of $13. Looking at the numbers for 2012 and beyond is even bleaker and points to a single digit stock.
The problem is acute for the leveraged shippers. These depressed rates are still marginally profitable to an unleveraged shipper, but not so for those leveraged up like Genco, especially with boats bought in the boom years of ‘07 & early ’08. The industry incentive to scrap the older ships just isn’t strong enough yet….they still contribute positive cash flow and will limp along for a few more years. Even those like Audio that argue for a collapse of the BDI, won’t really be happy with the results. Companies may go bankrupt, but most of their ships won’t “go away” they will just enter the resale market, depressing ship values and giving the stronger unleveraged shippers a low entry price and further charter pricing advantages.
Add to that the ventures like Vale’s fleet of VLOC monsters and Chinas own massive government sponsored fleet, which don’t operate with the same goals or constraints as the independent shipper…. It will take years, if not a decade, to sort this out and many of the smaller weaker shippers may not survive.
So now, blast away, but don’t expect a response to the typical drivel I see on these boards. Let’s just see how things sort out in Feb ’11 when GNK reports. Full disclosure…. I’m short a 150 Jan ’11 and Feb ’11 $14 “in the money” calls and may add to that position.
GNK does not have significant debt expiration near term and their interest rates are relatively low and/or hedged with interest rate swaps
Their debt service load is a bit less than $20M/Qtr to service the 2007 $1.3B line and the rest to serve the $100M and $253M facilities issued this year. The larger debt service payments start in 2H 2012 when $50M/Qtr is due on the $1.3B line alone. Bottom line is that GNK has plenty of cash reserves and cash flow (mostly recaptured depreciation) to service these debts out to 2015 or 2016 even under my dire predictions.
This filing is clearly for $500M of equity or convertible offerings which will massively dilute current shareholders.
The question I ask is "Why now". They don't need the cash now... If the future looked better one or two years out, they could easily wait and tap the markets then. The answer may be that they don't see such a rosy scenario and want to tap markets while they can, or it's possible that they may try a diversification scheme ala Uncle George at DRYS. Either way, still see near term downside.
Asia's turned down hard tonight in the last hour - especially Shanghai and the Hang Seng. I'm sorry but this whole situation with inflation in China is going to come to a head soon and commodities and the people who haul them are not going to like that.
Of course, I'd love to see copper drop about 2 bucks a pound and squeeze Jamie Dimon's nuts down to the size of a molecule, him of the cornered copper market holding 80-90% of the copper at the LME and maybe 50% of the world storage. because his pals at the CFTC don't want to change position limit requirements... couldn't happen to a bigger slimeball.
I have already hear that kind of negativity. As it is always the case, the market is rather nervous and always shoot to the extremes.
While I don't buy the myth that the renewed China appetite for exported coal will by itself drive the BDI to high levels, I do believe that there is just too much negativities floating around. People tend to forget that so many ship orders have been canceled, and many other aging ships are not being replaced (or at least, orders are being delayed)
Another important factor in the equation is that many shippers will just stop chartering their ships below certain prices ....... it just doesn't make economical sense. The leanest, largest, and best managed company will do well going forward.
Finally, the main mis-calculation is that the market is way under-estimating the potential/pent-up demand out there. The global GDP is ahead of where it was at the peak times, and there haven't been that many ships built to overwhelm the demand. Also, something that's overlooked is the ports congestion factor ........... haven't seen a whole lot of ports expansion going on
my 2 cents
You forgot one tiny little thing - SCRAPPING. Which unfortunately for you doesn't apply to GNK's young fleet BTW. That ought to throw a little monkey wrench into your crystal ball wizardry. Need a new calculator for Christmas? Thanks for the song and dance. Better get working on your 2nd grade project.
Merry Christmas yourself, you'll need it.
"You forgot one tiny little thing - SCRAPPING."
You could keep all the breakers working round the clock and not appreciable dent this orderbook for the next two years. That won't happen anyway since I've stated earlier that these rates are still marginally profitable for the unleveraged drybulker. There are hundreds of small owners like this who will operate the older ships as cash cows until the hulls crack
As far as missing Q4 street targets, that is a given if you watched their presentation. They told us what their costs would be and we can all see the BDI index. That is already baked into its current price.
I would like to know where you got an industry average 6.5 PE. That is low for the good players. It's impossible to pick an average because of the number of small players and the past 3 years of volatility.
But I am going to look strictly at the financials and what a good return on investment would be long term, and say 8.5 is a reasonable valuation for any stock regardless of sector. That being the case, and assuming the BDI drops to the prior year's low, I suspect 2011 lowest earnings for the year would be $2.00 (half of this year). That's pretty bearish, so given a 8.5 average at $2, and this is at least a $17 stock in that worst case environment if you are a buy and hold investor. At a 6.5, its a $13 stock--not alot of room on the short side given even your low PE. And $2 is profit after servicing the debt. Roll those retained earnings into the debt number and they are paying off debt if they choose not to grow. The stock is clearly already oversold and shorted too much.
Perhaps the truth is somewhere in the middle on earnings...so let's assume that instead of $2 next year or $4 like they did this year, they post $3. Using your 6.5 PE, and you get $19.50 for a "reasonable" valuation.
Here is what I predict will happen: We've hit the low for the stock. Genco is able to maintain their profitability for the next year and pay down debt to industry averages (it's only slightly above now). They re-institute the dividend in the third or 4th quarter of next year. PE returns to a reasonable valuation, and this stock is at $21 by year's end and pays a dividend. Yearly earnings are between $3 and $4.
It would be foolish to short from here. As I see the options line up now, this stock will float to $15 and $16 by February.
"I would like to know where you got an industry average 6.5 PE"
That PE is over the past 4 years or so for pure-play drybulkers and reflects the average over the boom & bust cycle. These guys are like the auto companies were for the last 3 decades before the collapse in 2008. The street punishes their chronic habit of mismanaging supply/demand cycles with a low PE.
GNK earnings will be in decline for the next 3 years based on the high $$ long term charter expirations. They may very well lose money in FY 2012 at current shipping rates (let alone FFA rates which are lower).
If you believe that worldwide growth will fuel enough commodity shipping to overcome the orderbook supply, then the story will improve, but then why not trade FFAs on Imarex and eliminate the company specific risks.
Lastly, the $500M shelf announced yesterday is a game changer on a number of fronts... some good like shoring up the balance sheet and some bad like potentially 100% dilution of current equity holders. You have to ask yourself why they would announce this now basically on Christmas Eve, when the stock is at 18 month lows... I can't come up with a "positive" spin to the near term equity prices , but I'm sure some will. Peter G must be hanging out with Uncle George these days....
Good Luck and Merry Chritmas!
I've owned GNK for quite a while, and it seems to trade in it's own little world, typical stats used to evaluate it like P/E and such are almost meaningless (at least from my view). But here's a comparison of what I consider a few of GNK's peers:
So GNK's P/E is almost 50% lower than those of that group, and 80% lower than the industry avg (whatever Yahoo uses to calculate that).
Another stat I just culled from Yahoo, same group of shippers:
PEG (5 yr expected):
You could argue that GNK is pretty darn expensive, the PEG is 330% above the industry avg. And for what it's worth, the 19-20 analysts that follow GNK have 2010 earnings estimates of $4.22, dropping to $2.73 in 2011 (35% decrease). The others:
Symbol 2010 2011
NM $0.71 $1.06
DSX $1.60 $1.53
EGLE $0.44 $0.25 <== Yikes!
EXM $0.49 $0.51
I've been trying to post a lengthy article about the general industry from the site where I get the morning BDI numbers, but it won't print. Tried 3 times, don't know why.
Anyway, does your calculation take into effect the overhang of new vessels coming online. This quote indicated that for 2010 there has been 75 million net new dwt that has been added to the world fleet, and the 200th cape just rolled off the ramp.
If a lot of smaller, financially strapped players are holding onto their existing fleets rather than rolling out to new vessels, would this extra tonnage have a substantial affect on PE and earnings assumptions?
GNK is no more trading on fundamentals. That is the truth. Seondly, it does not matter whether it will go 13 or 10. That would be a great buying opportunty, like the way I bought LVS at 3.50 and ACAS at 0,69. Next year at some point of time GNK will rise to 25-30. That is when you should start wondering about the fundamentals.
"GNK is no more trading on fundamentals. That is the truth. Seondly, it does not matter whether it will go 13 or 10. That would be a great buying opportunty, like the way I bought LVS at 3.50 and ACAS at 0,69. Next year at some point of time GNK will rise to 25-30. That is when you should start wondering about the fundamentals."
Anything is possible and part of me wants you to be right, but the engineer in me won't ignore a whole heap of facts that speak otherwise. Also, part of the past magic in the shipping industry was volitile momentum trading and that has faded in recent months.
I've not done nearly the depth of study of DRYS, partly because it's more complicated with mixed UDW and drybulk assets. From what I do know, it is the UDW business that is responsible for DRYS recent relative strength. Without it, Drys would be in just as bad of shape as GNK as a pure play Drybulker.
I believe DRYS investor focus is on their ultra deep water drilling business.
George uses DRYS as an atm machine and has plagued this company with
tremendous dilution. It's a shame, but always remember when dealing with
George in business he thinks U.S. investors are stupid.
Thanks for the analysis, exactly what I've been looking for! What do you think about DSX? They have a much better bottom line, at least compared to GNK, which is in debt up to their necks.
The breaking news bit, Santa comes to insiders, alert courtesy of InsiderTrades.org:
GEORGIOPOULOS PETER C bought 200,000 Common Stock @ $0.00 per share.
GEORGIOPOULOS PETER C is a director at GENCO SHIPPING & TRADING LTD (GNK). This transaction represents a 4.9392% change in their holdings.
This transaction became public at 4:51PM today but actually occurred on Tuesday.
BUCHANAN ROBERT GERALD bought 25,000 Common Stock @ $0.00 per share.
BUCHANAN ROBERT GERALD is an officer at GENCO SHIPPING & TRADING LTD (GNK). This transaction represents a 26.5173% change in their holdings.
This transaction became public at 4:50PM today but actually occurred on Tuesday.
Warning! 10b5-1(c) Transaction!
The InsiderTrades.org automated analysis system has identified that this is probably a trade that took place under a 10b5-1(c) plan. Trades performed as part of a 10b5-1(c) plan are a special type of insider trade that can be indicative of pending adverse news according to leaked documents from JP Morgan (http://wikileaks.org/wiki/Whistleblower_exposes_insider_trading_program_at_JP_Morgan) and academic researchers (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=541502).\r\n\r\n
* The SEC allows changes in benificial ownership to be reported within up to two days from the date of the actual trade.
* A >10% owner may be an entity of another individual/company/trust that as a whole owns >10%.
* A purchase price of $0 indicates some sort of internal options plan rather than open-market purchase.
The 200,000 shares of common stock of the issuer in the transaction reported on this form are a grant of restricted stock. The shares will generally vest, if at all, in equal installments on each of the first four anniversaries of November 15, 2010.