After laying dormant for years, the shipping industry finally began showing signs of life in the first half of 2018. There's still plenty of ground to make up, especially when it comes to share prices, but the global containership industry appears to be on an upward trajectory. Average daily charter rates are climbing on the heels of a tighter balance between supply and demand, while the number of new ships under construction or contracted to be built is at a more than 30-year low.
That's all good news for Seaspan (NYSE: SSW) and Navios Maritime Partners (NYSE: NMM), which each reported growth and positive developments in the first quarter of 2018. Both shipping stocks have at least doubled the total returns of the S&P 500 in the last year, although that wasn't difficult to do considering both had share prices near historic lows at the beginning of the period. Looking forward, which company is better positioned to continue creating value for shareholders?
Image source: Getty Images.
Seaspan has been firing on all cylinders recently. The world's largest containership company by fleet capacity leaned on rapidly improving daily charter rates to grow first-quarter 2018 revenue 12%, net income 69%, and cash available for distribution 8.6% compared to the year-ago period. Management primed shareholders to expect revenue to climb 24% quarter over quarter the next time the business reports results.
The wind is clearly at the company's back -- and management isn't wasting the opportunity to pursue an aggressive growth strategy. Seaspan moved to acquire the remaining 89% of Greater China Intermodal Investments (GCI) that it didn't already own, which will give the company 8% of global containership capacity and help to diversify revenue more evenly across the top customers. The merger will also bring $1.3 billion in contracted revenue to the portfolio, enough to lift earnings 20% this year.
The $1.6 billion acquisition of GCI was made possible by Seaspan's largest shareholder, Fairfax Financial, which agreed to sock another $500 million into the shipping leader. The first half of the investment closed on July 16, and the remainder will be handed over in January 2019. By then, the company's younger and larger fleet should be raking in enough additional cash flow -- thanks in large part to fast-growing charter prices -- to make the $250 million received gravy on top for shareholders.
Image source: Getty Images.
Navios Maritime Partners also has worked to reconfigure its dry bulk fleet and better position itself to take advantage of the industrywide recovery under way. It ended the first quarter of 2018 with 36 vessels, compared to only 31 at the end of the year-ago period. That, combined with higher daily charter rates and contract prices, lifted revenue 25% and increased EBITDA 36% in the comparison periods.
To demonstrate just how rapidly market dynamics are shifting to favor vessel owners, management recently disclosed several data points about its long-term contracted revenue. The company ended March with 73% of available days for its fleet for the remainder of 2018 contracted out at an average price of $17,561 per day. However, customers are eager to hedge their future needs, as evidenced by the fact that Navios Maritime Partners has contracted out 16% of its 2020 operations at an average daily rate of $29,992. That's an increase of 71% compared to current prices.
Additionally, since the end of the first quarter of 2018, the company has received three new Panamax vessels, while announcing the sale of one containership and the option to sell the remaining four such vessels in its fleet. If all five are sold, the company could realize up to $180 million in gross proceeds while simultaneously lowering the average age of its operating fleet. With dry bulk charter rates soaring, it's not difficult to see why management is tempted to exit the containership business altogether.
Image source: Getty Images.
By the numbers
While the two companies used to be valued on par with one another, they've taken very different paths through the market in the last 10 years. Today, Seaspan boasts a market valuation of $1.25 billion, while Navios Maritime Partners has a market cap of around $350 million (and it used to be much, much lower). Part of that has to do with fleet mix, with the former all-in on containerships and the latter wheeling and dealing in a variety of dry bulk vessels. Part of it has to do with fleet size and market share. It's worth mentioning once again that Seaspan owns 8% of the global containership market -- an astounding share for such a critically important market.
The divergence in fleet composition and size has played out in how Mr. Market values each stock, too. Here's how they stack up side by side on various metrics:
Navios Maritime Partners
Five-year total return
Q1 2018 fleet utilization rate
Average remaining charter period
Data sources: Yahoo! Finance, company presentations.
Let's break that down. For comparing fleets, Seaspan has a lower utilization rate but a longer average charter period remaining compared to Navios Maritime Partners, mostly due to the differences in fleet composition. However, the larger company is using its size to its advantage, using its massive fleet to take out secured debt to pump investments back into portfolio expansion and acquisitions. The strategy has generally worked to date, and if charter rates continue to increase, then it could lead to much higher earnings and cash flow in the near future.
Navios Maritime Partners should be able to grow out of its multiyear rut, too, but its fleet makeup has so far not resulted in a similar level of profitability as Seaspan. That's evident by the stock's higher valuation compared to future earnings and its lower valuation priced against equity (book value) and debt.
The better buy is...
Neither stock has been great to shareholders in the last five years. That's a great reminder of the boom-bust nature of the global shipping industry. While it looks as if the next few years will be much better than the recent past, I think investors would be better off owning the larger company. Seaspan is a better buy because of its size and financial flexibility, which will allow it to more fully exploit the opportunities presented by the industry recovery.
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