Not All Shipping Is Sinking

By Stephen D. Simpson, CFA | March 11, 2011 AAA

Maybe it seems obvious, but a tanker ship is nothing like a dry bulk carrier, and both are nothing like a containership. Oh true, they are all very large boats and they all operate on the same underlying economic basis - ship supply, demand for carriage, day rates, contract coverage and so on. When it comes right down to it, though, it sometimes seems like there are more differences than similarities. (For a quick refresher on the state of the industry, check out Has Dry Bulk Shipping Reached Low Tide?)

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Lately, the performance and expectations of dry bulk carriers has been underwhelming. Look at the container shipping market, though, and the picture is quite a bit different. Investors here have seen largely a strong run from 2009 and many of these companies throw off good dividends as well. What's more, with a different sort of leverage to global trade than the bulk carriers, they could represent a worthwhile balance in a portfolio.

Have Boat, Will Travel
Containerization was a major development in the shipping world, allowing carriers to become far more efficient in loading, carrying and unloading cargo. Better still, a container ship can carry almost anything - as long the goods fit into a standard container, it's not a problem. So whereas a dry bulk company like DryShips (Nasdaq:DRYS) or Genco (NYSE:GNK) will devote an entire ship to iron ore or grain, a containership can holds hundreds of different kinds of cargoes at the same time.

Unfortunately, it has not always been easy to trade containership stocks in the United States. Most of the major players - Maersk, Mediterranean Shipping, CMA, Evergreen - are either private or traded on foreign exchanges. But there are still a few names that investors can play, such as Paragon Shipping (Nasdaq:PRGN), Seaspan (NYSE:SSW), Euroseas (Nasdaq: ESEA) and Danaos (NYSE:DAC). Better still for many investors, the first three pay dividends and Paragon and Euroseas have rather attractive yields. (For more, see Dividend Facts You May Not Know.)

Buy The Boat Or The Box?
Containership investing does give investors a second option, though, beyond investing in the boat operators. No, not the crane manufacturers or intermodal logistics companies (though Echo Global Logistics (Nasdaq:ECHO) and Konecranes are worth a look). Instead, consider the containers themselves. There is an entire industry set up around buying and leasing the containers, and here too investors have a choice among companies with different capital management philosophies (meaning different philosophies on dividends).

Not only do container leasing companies benefit from ongoing demand for trade, but shippers themselves are turning to slower operating speeds as a way of offsetting fuel costs. That means that more containers are held up longer in shipment and that's good for the lessors. Perhaps it is no great surprise then that utilization rates are extremely high right now.

So who are the big fish in this market? That somewhat depends on the metric an investor wishes to use. TAL International (NYSE:TAL) is largest in terms of lease assets, while Textainer Group Holdings (NYSE:TGH) has a larger number of units. SeaCube (NYSE:BOX) and CAI International (NYSE:CAP) are smaller, and SeaCube actually gets a lot of revenue from leases that transfer ownership of the containers to the lessees after the lease is finished. BOX and TAL both also offer relatively robust dividend yields, while CAP currently pays no dividend.

The Outlook
Rates in the dry bulk space are off the bottom, but still quite low on a historical basis - recent Supramax rates are about 70% of the 2010 level and less than one-third of the 2007 level. By comparison, containership rates are about 50% higher than in 2010 and two-thirds of the 2007 level.

Factoring in the impact of fuel costs, supply additions, and the length of this recovery, the rally in containerships may be a bit long in the tooth. By comparison, the outlook for containers themselves is pretty positive and investors can likely still take positions here and do alright - particularly those with an interest in income investing. (For more, see The Power Of Dividends.)

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