How to Turn a Tidal Wave of Profit From the Global Shipping Industry

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The shipping industry plays an indispensable role in connecting consumers with their most cherished goods. But many investors unfamiliar with its inner-workings underestimate its potential as a massive profit generator.

Meanwhile, investors who are aware of its importance, and can track the volatile ups and downs of the companies that provide shipping services, frequently score big gains from its oft-repeating profit opportunities.

To get a quick idea of the enormity of worldwide shipping activity, you need only look at the U.S. trade numbers.

In March 2011 alone (the last month for which complete figures are available), the United States imported $220.8 billion worth of petroleum, other raw and agricultural materials, and finished products from foreign countries. And more than 90% of that total entered by ship.

At the same time, the United States sent $172.7 billion worth of manufactured goods, grains, and assorted other materials abroad.

Because of differences in reporting standards and fluctuating currency values, worldwide totals are harder to grasp, but the industry's major trade group, International Chamber of Shipping, estimates that marine shippers transported over 7.7 billion tons of cargo in 2008, covering more than 32 trillion miles and generating roughly $380 billion in freight charges alone.

And that was in a year hit midway by a global recession.

Responsible for those shipping totals is a worldwide fleet of more than 50,000 merchant ships registered in more than 150 countries and employing more than 1 million crewmembers. Because of liberal laws and tax incentives, Panama and Liberia play host to the most registered merchant vessels. Ships flying those country's flags accounted for nearly 300 million tons of cargo in October 2010 alone.

A Shipping Industry Overview

From an investment standpoint, the sheer magnitude of the industry can make picking tops, bottoms and winning stocks a challenge. Fortunately, there are several key indexes that investors can use to track the ebb and flow of shipping activity as well as company fortunes.

Among the most important are:

  • The Baltic Dirty Tanker Index (BIDY): The Baltic Dirty Tanker Index is one of several tracking indexes maintained by the London-based Baltic Exchange. It tracks freight rates for crude oil transportation on the 12 busiest global routes.
  • The Baltic Dry Shipping Index (BDIY): Also maintained by the Baltic Exchange, the BDIY tracks freight rates for dry bulk cargo such as iron ore, coal and grains.
  • The China Containerized Freight Index (CCFI): Maintained by the Shanghai Shipping Exchange, the CCFI is the leading index tracking the movement of goods around the globe aboard container ships.

These three indexes provide a broad overview of the major segments of the marine shipping industry and are most valuable for spotting trends that could affect the fortunes of the sector as a whole and the individual companies in each.

For more specific shipping information, the Baltic Exchange maintains five other indexes covering various sectors within the industry, and Capital Link Shipping, an investor-oriented industry-monitoring group, also compiles seven indexes covering the overall market, tankers, bulk freighters, liquefied natural gas (LNG) vessels and others.

Other industry news and helpful data on trade trends, shipping demand and other areas of global economic activity can be found in the "By the Numbers" section of the Journal of Commerce Website. If you want to know how a specific trade element might affect a shipping company stock you're considering, you can probably find it there (though you will have to register to access much of the data).

Choppy Waters

Unfortunately, analyzing the outlook for the shipping industry isn't quite as simple as for some other businesses.

Conventional wisdom says a higher level of economic activity means shipping services will be in greater demand, and shippers can charge higher rates and reap larger profits. But that's not always the case.

In the first quarter of 2011, for example, container freight rates climbed based on improving economic prospects and a shortage of shipping capacity. As a result, the average daily earnings for a ship capable of carrying 4,250 20-foot-equivalent units (TEUs) – an industry standard for measuring container freight, based on the length of a typical shipping container – rose to $28,603, according to the Journal of Commerce.

However, the profits of many shipping companies – and the prices of their stocks – actually fell in that time because of higher fuel prices, which substantially increased operating costs.

Over the past two months, demand has continued to rise, but freight rates have slipped because a number of new ships have been launched this year and the major shipping lines now have sufficient capacity to meet that demand. As a result, the average daily earnings for a 4,250 TEU container ship fell to $26,798 at the end of April. But recent declines in the price of oil have given some respite from fuel expenses.

In summary then, shipping profits tend to be determined by a combination of general economic health, fuel prices and demand relative to available capacity.

Right now, prospects for a rebound in both shipping profits and stocks of shipping companies look fairly promising. The major maritime indexes remain near their most recent lows and the U.S. and global economies – while certainly not robust – continue to trudge higher. That should keep shipping demand growing enough to absorb the recent excess cargo capacity. Add in falling fuel prices, and an improvement in both operating margins and total profits should be in the cards for the remainder of the year.

How to Profit from the Global Shipping Industry

As noted earlier, there are lots of potential investment choices among the shippers, but the best opportunities might lie with the operators of fleets that consist mostly of smaller vessels. That's because they have more flexibility in the types of cargo they can carry, have proportionately lower fuel costs and suffered less in the recent downturn.

For example, average daily earnings for 2,500-TEU container ships fell just 3.6% (from $15,971 to $15,391) between the end of March and the end of April, compared to 6.3% for the larger vessels.

It's also good to look at companies that provide both ocean-going and inland shipping services, or that have non-shipping subsidiaries or divisions, since that added diversification will provide some extra downside protection if the broad economy falters.

Three companies that fit the bill are:

  • Euroseas Ltd. (Nasdaq: ESEA), recent price $4.65 – Euroseas provides worldwide shipping services with a fleet of five medium-sized drybulk carriers, nine containerships and one multi-purpose vessel. Total capacity of the drybulk carriers is 331,808 deadweight tons, while the nine container ships can carry 15,779 TEU units.

Euroseas posted respective profits of $1.68 and 70 cents a share in 2007 and 2008, before taking a loss of 51 cents a share in 2009. However, the loss was cut to 21 cents a share in 2010 and the company reported a small profit for the first quarter of 2011. The 28-cent dividend is good for a 6% yield at current prices. The stock is near its 52-week high of $5.28, set in early April, but well off the $14 to $18 range it traded in prior to the 2008 downturn.

  • K-Sea Transportation Partners L.P. (NYSE: KSP), recent price $8.14 – KSP's 2010 numbers look weak, with a 38-cent per share loss, but the company was profitable for the five years prior to that, earning $1.68 a share in 2008 and 70 cents a share in 2009.

K-Sea primarily operates tank barges that carry refined petroleum products (4.2 million barrels of capacity), with a client list that includes BP PLC (NYSE ADR: BP), ExxonMobil Corp. (NYSE: XOM) and ConocoPhillips (NYSE: COP). However, it also has a fleet of 66 tugboats servicing all types of shipping on inland U.S. waterways.

The stock traded well above $30 a share for most of 2005-2008, hitting a high of $47.50 in mid-2007. It's languished near $5 for much of the past year, but has bounced back in recent weeks, thanks to increased buying by institutions, which now hold nearly 30% of the shares.

  • Tsakos Energy Navigation Ltd. (NYSE: TNP), recent price $9.87 – If you always wanted to be a Greek shipping tycoon, Tsakos could be just your ticket. The Athens-based company has a fleet of modern oil tankers, and provides petroleum transportation and tanker-management services to other major shippers. It does everything from hiring crews and buying supplies in bulk to earning smaller shippers better rates. The company has been profitable in each of the past five years, earning as much as $4.43 a share in 2008. It reported an 8-cent per share profit in the first quarter of 2011. The stock, which pays a 60-cent dividend (6%) recently cracked the $10 barrier after trading below that mark since last November, but it remains well below the $38-plus level at which it traded in mid-2008.

If you prefer a better-known player in the world of global marine shipping, a good candidate is:

  • Seaspan Corp. (NYSE: SSW), recent price $16.76 – Hong Kong-based Seaspan owns and operates more than 40 large containerships, most under six years old, and is a leading shipper on the China-to-U.S. West Coast routes. Although it posted losses in 2008 and 2010, the company has had steadily growing revenues over the past five years and its operating margin has remained fairly constant near 50%. The current dividend is just 76 cents, a 4.9% yield, but the company has a history of raising payouts quickly when profits improve. Institutions own 18% of the stock.

Surprisingly, given the scale of the industry, opportunities to play shipping through funds are quite limited – and a couple of shipping-related exchange-traded funds (ETFs) have actually failed.

However, if you prefer the fund approach, you might take a look at the Guggenheim Shipping ETF (NYSE: SEA), recent price $23.84.

Set up in September 2008, the SEA fund tracks the Delta Global Shipping Index, which includes stocks of companies in all facets of the worldwide cargo markets. The fund took an immediate hit in the 2008-2009 market collapse, tumbling from above $25 to a low of $7.32 in just two months. However, it has rebounded nicely and traded above $25 a share from June 2010 until just last week.

You may not see massive initial gains with a shipping industry investment, but if oil prices continue to fall and the global recovery continues, you can be fairly sure the stocks in this sector will be among those riding the crest of the economic wave.

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Join the conversation. Click here to jump to comments…

  1. Peter de Vree | May 27, 2011

    I really wonder how old these reviews are. Recommendation/review above for KSP while that company has received end march a take-over proposal from KEX (Kirby Corporation)

  2. cashflowmantra | May 27, 2011

    I follow the industry reasonably closely because I own DRYS stock. The biggest story right now driving prices is the amount of supply coming onto the market which is suppressing rates. I am holding for a longer time frame so plan on using DRYS as an inflation play when the next bubble comes along. Easy money globally will eventually lead to it so I am content to wait in the meantime.

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