I am not optimistic about most stocks. In fact I’m quite bearish for the S&P 500. It is among the weird corners of the marketplace where I am seeking and finding interesting ideas. One example of such a corner is the shipping companies. All types of marine transportation whether it’s tankers, bulkers or containers are really depressed right now because there’s overcapacity. 

Using the beta of VLCCAnalyzer I find that DHT Holding’s fleet is cheap compared to alternatives and I want to explore it to see if there’s something there. 

First thing I looked at analyst quotes:

The $0.03 per share mean estimate for the next quarter is not instantly enticing to say the least. Shipping rates are famously very volatile so a low current rate could be to our advantage. With the present low rates earnings are extremely depressed across the industry. There is little interest from companies to order new ships and in time this will drive the cycle to another extreme.

For illustrative purposes look at the earnings ceiling for DHT in earnings per share:

With the share price at $3.62 it’s possible to purchase into this type of business when it’s trading in 4x absolutely free cash flow or 7.9x EV/EBITDA, that is quite intriguing.

The secret to shipping is not to bankrupt. The industry is super competitive and to achieve competitive rates it is necessary to utilize debt. The debt further enhances volatility and the result is shipping investors experience excruciating ups-and-downs.

1) I like companies that keep a lot of ships on spot.

2) You want to be able to endure the downturns that always come. Either by selecting lowest cost operators or companies with relatively little debt or high quality assets. Preferably a mix of all three.

DHT’s fleet is probably quite undervalued as VLCCanalyzer indicates a large discrepancy between Enterprise Value and its Fleet Value. In theory the larger this discrepancy is, the more attractive the opportunity. The fleet is indeed quite young and there are very few old vessels. Older vessels tend to be less fuel efficient. Currently the industry is undergoing changes that make fuel efficiency particularly important. Management also keeps a high number of vessels on spot prices which is quite advantageous: