TBS International Limited (TBSI) is trading at levels not seen since the beginning of 2007. Its hard to believe that this company expected to earn $5.76 per share is now below $9.00 per share. The stock actually came public at $10.00 back in June of 2005 but took about two years before mounting its sharp rally which peaked above $71.
If misery loves company, then TBSI should appreciate the fact that many of its peers are in the same boat (pardon the pun). As fears of a worldwide recession materialize, the demand for shipping is expected to deteriorate. Exports of finished goods will grow at slower rates, and demand for steel, grain, fuel, and other raw materials could be sharply lower than expectations. While many shippers have their vessels locked into long-term contracts, there is a lingering question of what will happen once those contracts run out.
TBSI actually operates from a different business model than many of its peers. The company seeks to serve as a niche provider to clients offering flexible and company specific solutions to transportation needs. As such, TBSI has built a fleet that includes a large assortment of different size vessels in order to meet varying needs of clients. The company continues to build out its arsenal of ships by purchasing new and used vessels continually. In the last quarter alone, the company has taken delivery of two handymax ships and announced the acquisition of another vessel which will be delivered late this year.
Because of its aggressive pace of acquisitions, investors are shunning the stock expecting overcapacity in the industry to lead to lower productivity for all parties involved. TBS is certainly not immune to the issues of the industry, but looking at the company’s assets it appears the market has swung too far on the side of caution. The stock is currently trading at roughly 80% of book value meaning that if the company were to shut down tomorrow and liquidate its assets, investors would come away with a 25% increase.
Now certainly some of the assets may be carried at a higher value than true liquidation prices as accounting rules permit the firm to depreciate purchases across thier useful lifespan. It is also nearly certain that next year’s earnings will fall below the current record breaking estimat of $5.76 for 2008. However, the market appears to be pricing in a strong chance that the company will simply shut down and discontinue operations. This is simply not a likely scenario.
The management team is likely making some very wise strategic moves during this time of panic and crisis. When capital assets like large ships are on sale, and shipyards have the capacity to manufacture or refit aging ships, one should take advantage of the opportunities. Assuming that sometime during the next decade the demand for shipping will rise (which is almost certainly the case), and further assuming management does not take on too much of a debt load that cannot be serviced (currently debt is just 49% of equity), TBSI should survive this challenge and offer strong value to patient investors.
FD: Author does not have a position in TBSI
Additional Reading:
Trader Mark – The Shipping Crisis Deepens
Barrons – Dry Bulk Carriers Not Ship Shape
