Navios Keeps Its Head Above Water


The dry bulk shipping stocks as a group have plunged 40,000 leagues or more from where they stood at the beginning of 2011, and the longer-term charts hardly look any prettier.

Increasingly, the prolonged nature of the industry's epic downturn has yielded a set of distressed equity valuations that suggest the market questions the very survivability of these operators. While there is no sign that the challenges facing these shippers are abating, the bravest of value investors may wish to continue scouring this beleaguered industry for those operators that are least likely to sink to the seafloor in outright failure.

With an adaptive approach to survival of the fittest that Charles Darwin himself would have admired, I have repeatedly highlighted Diana Shipping (NYS: DSX) over the years as the shipper most likely to remain afloat no matter how long this downturn might last. While my conviction in that regard remains unshaken, that has not spared me from some regret over my decision to begin bargain-hunting when I did ... far too early.

Navios Maritime Holdings (NYS: NM) released second-quarter earnings this week, so let's take the opportunity to consider this operator's own prospects for surviving this ultimate Darwinian struggle. The headline numbers look impressive enough, with the company's quarterly net income of $51 million representing around 14% of the shipper's entire market capitalization ... but the adjusted numbers offer a truer depiction of the challenging operational reality. Adjusted EPS collapsed 53% to $0.12 per share (a profit of $12 million). For reference, Genco Shipping & Trading (NYS: GNK) posted a second-quarter profit of $10.1 million, but its market capitalization is 40% smaller.

But let's face it: a profit is a profit, and considering that spot-charter rates dipped beneath break-even levels during the period, both operators exhibited resilience by posting any profit at all. Of course, their achievements are due in large part to the use of long-term charter contracts that can insulate operators from volatility in the spot-rate environment. The longer these spot-charter rates remain insufficient for a spot operator like Baltic Trading (NYS: BALT) to turn a profit, the greater the risk that long-term operators like Navios will lose their insulation. Diana Shipping's average daily charter rate dropped only 7.5% year over year for the second quarter of 2011, but as my Foolish colleague Jim Mueller points out in this valuable discussion, Diana's new contracts signed thus far in 2011 have incurred an average decrease of 40.1% in the daily charter rate (when compared to the respective expiring contracts).

For now, Navios saw its average charter rate dip by only 10.4% to $23,681 per day. If this rate environment fails to improve for 2012 -- when only 45% of Navios' available days are covered by existing time charters -- Fools can expect the average rate to contract further. With ongoing profitability in question for all dry bulk operators, however, Fools may find some comfort in Navios' reasonable net-debt-to-capitalization ratio of 44.7%, and the insurance coverage that protects against the counterparty risk of chartering clients. Although I am in no hurry to initiate or add to any positions in the dry bulk industry at present, I will add Navios Maritime Holdings to my list of operators that I consider likely to survive the industry's crisis. The challenges will likely mount, particularly as Vale's (NYS: VALE) fleet of at least 35 gargantuan carriers hits the oceans, but I encourage Fools to remain vigilant of compelling long-term entry points for the industry's most likely survivors.

At the time thisarticle was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets. He owns shares of Baltic Trading, Diana Shipping, and DryShips. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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