Not really oversold. This is why I think it is not.
Before you read this, take into consideration that I am currently long on TEU. I will probably be reducing my position before the end of the year since it is by far my worst performer.
The reason for the decline is a simple one. The charter rates that the company can get right now are very low. TEU has a very limited number of ships (9) and most of them are on short term contracts. Only 2 of those are at market rates everything else is at about twice what they could get.
Bottom line: Every ship that needs to be chartered again means $2.5 million less to the company every year if they are lucky and $3.5 million less if they are unlucky. Since 3 ships are coming up for renewal during 2014 and 3 more are coming due during 2015 (approximately), it is easy to do the math when net income is running at about $16 million a year. You can expect profits to go down to anywhere between $5.5 million to $8.5 million next year. If the market does not get better in 2014, you can expect at best a break even scenario and at worst a loss.
The company's strategy is simple: To enter into short term charters and ride it out. I would not put too much value on the $235 million of stockholder equity. One has to assume that since the charter contracts has dropped so much that the underlying ships are probably overvalued in the balance sheet.
This is a risky stock in the sense that the performance depends on the turnaround of the industry which is at overcapacity. On the positive side, I doubt there is that many new ships being built given the depressed market and the management of the company seems to be experienced enough to keep the ships busy and making money. Getting in at this level could double or triple your money if the contract prices come back. Plus the company should be able to meet upcoming debt repayments with cash on hand and operational cash flow at least for one more year before they have to float another preferred.
Thanks everyone for you analysis. Last month I got out of DRYS (tax losses) and put that money into FRO, which went up more than 40% since, hence didn't want to add more, so added some TEU instead.
Looking at the number, I tend to agree with gw12345 and etradeemployscriminals below that this one looks to be more promising than others in case rates get better. Any negative that are not obvious? Any suggestions for a better speculative bet in the industry ?
Do not have any suggestions other than to say that buying at this level might be a bit premature. I expect the stock to continue to drift down below $2.50 or possibly lower in the next few weeks/months.
Since a lot of the appeal of the stock is the dividend, I would think those dividend investors would want a sustained 10%+ return from this type of risk. That means there is some room for the stock to fall.
By the way, I sold 2/3 of my holdings last week at $3.10 a share.
I don't disagree with you at all but the other shippers have already signed for lower priced deals. At least TEU has some time left on their high priced term contracts. For now the rest they are doing short term deals till the prices go up. This stock may go negative P/E but all the rest of the shippers are already losing money. TEU is the best in a bad neighborhood. That is the one to buy and wait.
Don't really disagree with your analysis. Things will not improve until day rates go up. Signing only short term leases is the only thing that makes sense in the current environment. It's like buying short term T-bills in expectation that long term interest rates will go up. TEU is in reasonable financial shape and in my view the risk/reward is better for TEU than many other shippers. It was smart of them to cut the dividend and start playing it safe. At some point this thing will turn. I buy stocks when they are out of favor and, yes, oversold, and then I patiently sit with them. That generally has worked for me in the past.