Kirby Not Just Floating Along

By Stephen D. Simpson, CFA | December 08, 2011 AAA

Investors who don't live near major waterways probably never give a thought to the inland barge industry, but Kirby (NYSE:KEX) has built quite a business for itself in this market. Better yet, this company has taken the cash from this lucrative transportation business and reinvested it in growth opportunities, like diesel engine servicing. Although the stock has done exceptionally well this year, investors may want to keep an eye on this name, in the hopes of pouncing on a pullback.

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Floating On
Kirby is far and away the largest player in the U.S. barge market, holding more than one-quarter share of the inland market and more than 20% of the harbor/coastal market. In fact, not only is Kirby the only publicly-traded pure play on barge transport, it's difficult to find any publicly-traded companies that are involved in this market at all; Enterprise Products Partners (NYSE:EPD) and Overseas Shipholding (NYSE:OSG) both have very small businesses in these markets.

So who cares about barges, anyway? Well, they are still a very viable means of ferrying products, like coal and petrochemicals. In the case of Kirby, the company uses its fleet of over 800 tank barges to move petrochemicals along major water routes, from producers like The Dow Chemical (NYSE:DOW), to users like paper, fiber and plastics companies. What's more, barge transport is 40% more fuel efficient than rail and 272% more efficient than trucks, so there are very valid economic reasons to use river transport when possible.

A New Growth Engine
Although Kirby's diesel engine services business has not traditionally garnered much attention, a sizable acquisition is likely to change this. In years past, Kirby focused on manufacturing and overhauling medium and high-speed engines for customers in markets like marine transport, energy, power gen and railroads. As a service provider they are not really in competition with Caterpillar (NYSE:CAT) or Cummins (NYSE:CMI).

Now, though, the company has a big opportunity in hydraulic fracturing equipment. Companies like Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) are adding fracturing capacity as fast as they can, as this is a key aspect to the economic viability of shale gas formations like Eagle Ford, Barnett and Marcellus. Simply put, without fracturing companies like Chesapeake Energy (NYSE:CHK) they can't garner enough oil and gas from these areas, to be viable.

Luckily for Kirby, fracturing is very hard on equipment and necessitates frequent maintenance and overhauls. Not only is there a service angle here for Kirby, but the company is now more involved in the manufacture of the equipment itself. Assuming further exploitation of natural gas in the U.S., this could be a real growth opportunity for Kirby in the years to come. (To know more about acquisitions, read Analyzing An Acquisition Announcement.)


Some Risks, but They Look Manageable
Given that two-thirds of the company's business comes from marine transport, the state of those waterways is a real concern. Like much of the country's infrastructure, waterway infrastructure, like locks, are old and getting older and there is a risk that underspending here could eventually impair the navigability of the waterways and Kirby's ability to offer its services.

Debt and the company's acquisitiveness could also concern some investors. Kirby has done a good job of paying down debt from its own cash flows in the past, but debt did spike on the recent acquisitions of United and K-Sea. Acquisitions have long been a key part of boosting Kirby's growth and while integration risk seems modest, given the company's experience, some investors may be troubled by the shrinking pool of quality acquisition candidates going forward.

The Bottom Line
With the stock already up 45% this year, it's no great surprise that the stock is no longer a real bargain. Even allowing for the growth potential of the diesel services business, it is hard to argue that the Street is not already fully up to speed on the potential here. Should the stock sell off, this would be a great name to consider adding for both the stability of its marine business and the growth potential of the fracturing operations. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)


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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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