Get 12% in an Ancient Business with a Bright Future

Thursday, November 5, 2009 - 10:40am

by Tom Hutchinson

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.

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 does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.