Sea stocks have always made me seasick
Genco’s price (NYSE: GNK) stocks are not exempt from the flutter that plagues all shipping stocks. This creates both plenty of opportunities for value purchases and nausea. The inherent volatility must be taken into account and for this exact reason, I caution against overexposure to the sector. However, planned carefully, shipping stocks can offer good value, large dividends and substantial capital gains. The volatility stems primarily from market forces rocking the stock as expectations for economic activity rise and fall. These market forces are neither silly nor myopic, but they reflect the surface rather than the deeper drivers of value.
The smart investor realizes that day-to-day price reflects the shock of opposing expectations, fear and greed of millions of people and dollars. The deep tendency, although slower to evolve, is more permanent. Go fishing for value in the troughs and you will be rewarded.
National security revamps global supply chains
The world order – the relationships between countries – is changing. The war of Russian aggression in Ukraine is not a catalyst but rather a manifestation of the tectonic shift we are experiencing. The world that emerged after the end of the Cold War with the United States as the hegemonic power has transformed into a multipolar world of competing centers of power. As international relations scholars and diplomats passionately debate exactly how this new world order should be forged, the will to use financial and economic power to advance political goals is clear. These range from small Chinese bans on a cartoon that looks like its leader, to state-sponsored corporate boycotts over concerns over slave labor being used to pick cotton, to multi-year projects aimed at reduce dependence on others for essential imports. The latter, deep currents reshaping our world, are the ones that concern us — and shipping companies like Genco. Why? Because these require the reorganization of global supply chains. And this reorganization of supply chains to increase resilience will come at the cost of less efficiency in the short and medium term, which implies, among other things, longer transport distances.
The rising autarkic forces do not herald the end of globalization or international trade, far from it. However, it is not as if trade is happening under a liberal rules-based world order. What is emerging is to rethink trade on the basis of national security. Although the economic arguments were most prominent in the debate over UK corn laws, protectionists raised the issue of national security:
Because free trade meant relying on foreigners for Britain’s food supply, the nation’s security became a matter of concern. National security remains to this day one of the most compelling arguments in favor of protectionism[…] If export markets were to dry up or agricultural exports were to hold back supplies (as in wartime), how would Britain get its food?
— Schonhardt-Bailey (2017) “Free Trade: The Repeal of the Corn Laws” in Frieden, Lake and Broz (eds.) International political economy. New York: WW Norton & Co., p.86
National security is precisely what drives Brazil’s National Fertilizer Plan, China’s drive to look to Africa as an alternative source to Australian iron, and Europe’s scramble to replace Russian gas.
oceans and ships
If you want to feel very small, you can go to the Grand Canyon, contemplate the immensity of the universe while gazing at the stars or simply look at a large seaport. The scale of goods transported by sea is breathtaking. It is practically impossible to move the amount of goods other than by sea. The difficulties associated with the export of landlocked Ukrainian grain are a striking example of the importance of maritime transport.
Genco is a dry bulk shipping company. That means it hauls dry, unpackaged cargo in gargantuan holds.
Dry bulk encompasses most of the basic inputs of our modern society. From agricultural raw materials to bulk minerals and cement. All of these have to be transported by sea in very large vessels. The world needs these commodities to feed, protect and otherwise maintain what makes modernity what it is.
Genco’s fleet and solid balance sheet
Genco has a moderate fleet of vessels in three sizes: capesize, supramax and ultramax. Capesize vessels are the largest and hold 170,000 to 180,000 deadweight tons; Supramax and Ultramax are smaller and carry approximately 60,000 deadweight tons.
Genco’s fleet is quite recent: the oldest vessels date from 2005 and their average age is just over 11 years. Several ultramax and capesize vessels have been acquired in recent years. You can find the fleet here.
More importantly, most of its fleet, at the time of writing, is either underway or loading/unloading. One way to measure utilization is the percentage of a ship’s draft from its maximum, because the more cargo a ship carries, the heavier it is and the less it rests. The average percentage of maximum draft for the entire fleet is currently over 75%. With just under half of the fleet heading to a destination and of those moored or anchored, the average maximum draft percentage is almost 74%, indicating that they are full. Genco is doing good business and his ships are in demand.
In addition to acquiring new vessels, Genco invested heavily in deleveraging its operations, thereby reducing its leverage. This is what makes its balance sheet stronger than some larger competitors, like Star Bulk (SBLK). It is also what will allow it to focus on dividend growth and withstand the cyclical nature of moving goods around the world. This is the strategy the company has executed well over the past several quarters.
The company has publicly expressed its desire to increase dividends while reducing debt on several earnings calls and this is a core strategy of the company. The importance of debt repayment and overall strategy is well illustrated in the analyst call comments of January 27, 2022
One of the reasons why this is extremely important for this dividend strategy is that it reduces our cash flow break-even point, so we are able to pay higher dividends due to this break-even point. very weak.
The value strategy is based on three pillars. It is based on large dividends from cash flow generation. I talked about the equilibrium rate. We have also reduced our debt, as I said. We will continue even though we will not have mandatory debt repayments in 2022, we will continue to repay debt over the year
John Wobensmith, President and CEO
Indeed, Genco has significantly increased its operating cash flow.
That’s why it’s a compelling buy
Cash flows into the business, the debt burden is quickly reduced while the fleet is increased (and utilized). Dividends have risen and the stock is now yielding over 17% following a recent selloff driven by broader market forces. This is a good time to buy, exploiting the dip created by investors reeling from the headlines.
Beyond the medium term, however, the outlook is bleaker, as the realignment of the global order and trade flows should find a new balance that is more efficient in terms of ton-miles than at present. Until then, Genco is doing good business while minimizing risk – and it passes the profits on to shareholders in the form of dividends. Buy now, collect your income for a few years and… invest in Gravol too!