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Published: November 5, 2009
The emergence of China and other developing
markets has exponentially and permanently increased the trade of
goods across the globe.
In the past decade alone, world trade has exploded to a level
far beyond what the world has ever known.
Then came the financial crisis.
The world was thrust into recession and international commerce
fell like a rock. According to the World Trade Organization, the
global exchange of goods has diminished by one-third in the past
year.
The crisis has wreaked havoc in an ancient business that is
highly reliant on world trade. That business is shipping.
The strong shipping companies will survive. The weaker
competitors will not. I found a company that has secured
revenues for the next several years. The company is also gaining
market share on the cheap and will be in a position to earn far
higher profits when the pace of trade resumes.
And, by the way, it pays a stratospheric 12% yield in the
meantime.
Navios Maritime Partners (NYSE: NMM) -- is a Greek
shipping company that transports bulk cargo such as grain, coal,
ore and cement to destinations throughout the world. The company
was formed by 55-year shipping veteran and general partner
Navios Maritime Holdings (NYSE: NM) in 2007, and soon after
purchased its fleet. The company currently operates ten vessels,
one Capesize (the largest ship made) and nine Panamax vessels
(the second largest).
What's so great about shipping?
Dry bulk shippers basically ship large quantities of everything
unpackaged and dry, like metal, industrial raw material, grain
and even sugar and fertilizer. The more the world industrializes
and trades, the more business there is for these shippers.
The Baltic Dry Index tracks the industry by measuring the going
rate for shipping on a daily basis. For 20 years, from 1982 to
2002, this sleepy index traded in an extremely tight range
between 800 and 1000. Then China and India burst on the
international scene as major economic players, and global trade
took off. The Baltic Dry Index exploded to nearly 12,000 by
mid-2008. When the financial crisis hit, the index dropped below
700 by the end of 2008. It has since recovered to about 3000.
The long-term demand dynamics that drove the index to 12,000
should return when the world economy recovers. In the short
term, however, prices can be volatile, and the pace of the
global economic recovery is still uncertain.
The Baltic Dry Index tracks the industry by measuring the
going rate for shipping on a daily basis. For 20 years, from
1982 to 2002, this sleepy index traded in an extremely tight
range between 800 and 1000. Then China and India burst on the
international scene as major economic players, and global trade
took off. The Baltic Dry Index exploded to nearly 12,000 by
mid-2008. When the financial crisis hit, the index dropped below
700 by the end of 2008. It has since recovered to about 3000.
The long-term demand dynamics that drove the index to 12,000
should return when the world economy recovers. In the short
term, however, prices can be volatile, and the pace of the
global economic recovery is still uncertain.
But Navios has the short-term risk covered.
The company has long-term charters, that is, contracts, for all
ten of its vessels. Navios has contracted 100% of available days
for 2009 and 2010 and 80% for 2011. In dollar terms, these
contracts generated $75 million in total revenue for Navios in
2008. They will generate $90 million for 2009, $96 million for
2010 and $81 million for 2011.
In tough times, the strong benefit from the fate of the weak,
and Navios has been increasing its future earnings potential by
acquiring new vessels on the cheap from troubled competitors.
The company bought a Panamax vessel in 2008 and two vessels in
2009, a Capesize vessel and a Panamax. The acquisitions were
paid for with a $1 million debt issuance and an equity offering
in May. This 3.2 million offering, that raised $34 million, was
not significantly dilutive to existing shareholders, as the
company had more than 20 million shares out at the time. Even
after the acquisitions, Navios has an easily manageable debt
load of 1.33 times unitholders' equity. As of the end of the
third quarter, net income of $10.8 million easily covered
interest expense of $1.7 million.
While Navios is dramatically increasing its future earnings
potential, the best part about the company is the current
distribution. As a master limited partnership, earnings are not
taxed at the corporate level provided the company pays out the
bulk of earnings to shareholders.
Navios pays an annual distribution of $1.60 per share -- or
"unit," to be precise -- in quarterly payments of $0.40. The
distribution was raised twice since late 2008 and, at today's
price, Novios yields an unbelievable 12.3% ($1.60/$13.00). The
distribution should be safe and growing as the company has
manageable debt, operating cash flow was more than three times
the money paid in distributions in the first half, and revenues
are up +34% in the first half of 2009.
Navios stands to profit when global trade increases because it
now has more ships to move the world's goods. Meanwhile, the
less certain short term is covered by locked-in revenues.
This is one of the most secure high 12% yields I've seen. The
share price should appreciate nicely over the long term as well.
At just a little more than eight times projected 2009 earnings,
Navios is cheap as well.
-- Tom Hutchinson
Staff Writer
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