Friday, October 29, 2021

"There's No Simple Fix": Maritime Analyst Breaks Down What Supply Chain Hell Means For Shipping Stocks"

 Source:

"This is ... an exclusive Fringe Finance interview with shipping analyst (and friend of mine) J Mintzmyer,

where we discuss the state of the supply chain in the country,

what’s next for the shipping industry and what stocks appeal to him in the difficult-to-understand and cyclical world of shipping.

J is a renowned maritime shipping analyst and investor who directs the Value Investor's Edge ("VIE") research platform on Seeking Alpha.  

You can follow him on Twitter @mintzmyer.

J is a frequent speaker at industry conferences, is regularly quoted in trade journals, and hosts a popular podcast featuring shipping industry executives.

J has earned a BS in Economics from the Air Force Academy, an MA in Public Policy from the University of Maryland, and is a PhD Candidate at Harvard University, where he researches global trade flows and security policy.


Q:
... Can you describe in layman's terms what the supply chain shortages are right now?

A:
There are supply chain bottlenecks almost everywhere we look!

This ranges from a shortage of available ships to log-jams at the nation's top ports, to insufficient storage and warehouse space, missing or broken truck chassis, rail line delays, and shortages of truck drivers.


Despite what politicians or other talking heads like Jamie Dimon might tell you, there's no simple fix to this situation.


This has been a long-time coming, primarily due to a decade of underinvestment and delayed port upgrades, and the COVID-19 disruption was simply the straw that broke the camel's back.

Are there any shipping name stocks that have caught your attention over the last few months, since we last talked?

Ironically, despite the rates going higher and higher and our companies earning stronger cash flows than even I expected to see this year, the majority of the stocks have lagged since June.

As the supply chain crisis goes more and more mainstream, it doesn't seem like most investors or traders have figured out that this segment of the market is poised to benefit tremendously.

Folks look at a chart like Danaos Corp (DAC) and see that it has gone up 15x since last fall and they figure, "wow, I'm too late!"

What they don't do is run the math and realize that the free cash flows have been surging so significantly that the enterprise values of these firms have barely moved (i.e. the stock is way up, but that's mostly just reflecting a massive debt pay down).

In many ways, a stock like DAC at $73 is cheaper today than it was last December at $20.

How does shipping and freight fit into the broken supply chain equation?

We are currently in the peak shipping season (normally August-November), which is due to pre-Holiday stocking which happens every year.

The supply-chain has already been stressed since Fall 2020, but we have went from 'moderate' stress to 'extreme' levels of disruption.

This disruption has caused an increased demand for available ship routes, which have caused global freight rates to soar by more than 4-5x from last year's levels.

Liners such as Maersk, COSCO, and ZIM are scrambling to fulfill the demand and therefore are willing to pay record lease rates to the owners of container ships, so we have a situation where there are both record freight rates and record ship leasing rates.

I read that LA and other ports still aren't working 24 hours a day, like most European ports do.

What are the ramifications of this? Will they eventually cave?

The shift to 24/7 operations is years overdue, especially in the peak August-November season; however, the ports simply don't have enough trained manpower and proper procedures to shift to 24/7 ops on a whim.

It's not about people 'caving' as much as it is about the need to design proper shift structures, hire enough workers, and train enough shift managers.

Finally, even with the ports open 24/7, this only addresses 1 of about 20 log-jam factors.

Along those lines, ports say that even truck drivers haven't been around in numbers of days past.

 Is this a contributing factor?

We have a nationwide shortage of truck drivers which has been a slowly developing problem for the past 4-5 years.

This didn't happen overnight, but nobody cared about this stuff until a few months ago.

This is a tough career field, but it can be financially rewarding and allow younger drivers with only a high school level education to become financially independent.

Unfortunately the benefits haven't been well explained and with all the hype around 'automated trucks'

(which are likely decades, or at least many years, away from being approved),

it's not surprising that there hasn't been enough new recruits over the past years.

Does it concern you that our country relies so much on imports and that we don't produce anything here?

It depends which categories you're asking about.

I would like to see more computer chips and other high-tech products manufactured in the United States,

but a large portion of these imports are in goods like shoes, clothes, and toys which we simply lack the competitive advantage to produce in the United States.

It is good economic sense to trade with other nations who can produce these lower-tech items more efficiently;

however, I would agree that the balance has gone too far.

More investment in high-tech manufacturing would be an obvious win for our country.


Source:

Part 2:  "Shipping Stocks "Significantly Undervalued" As 6 Year Bear Market Ends, Maritime Analyst Says"

Q:
What has changed in the shipping world since the last time you were on my podcast?

A:
The supply chain fiasco (which we started discussing back in September of 2020) has gotten much worse and is now totally mainstream.

Back when we talked in February, I don't think most folks really noticed or cared.

We've made significant returns in our portfolio since then, with our Risk/Reward model up about 43% and our Speculative model is up 94% since we talked in mid-February.

Can you update us on ZIM, which was one of your top picks this last time we spoke?

ZIM Integrated Shipping (ZIM) has been a phenomenal investment for us.

I sold the majority of my holdings at $59-$60 in mid-September as the stock looked to be overbought and I figured some of the large holders might trim their position.

In this case, I just got extremely lucky as the recent pullback gave me an opportunity to get long again and I actually have a larger net long exposure to ZIM now than I did even earlier this summer.

We have a fair value estimate of $70.00, and I expect to see $10-$12 in Q3-21 EPS and $11-$15 in Q4-21 EPS.

ZIM is net debt free and I estimate they currently have about $20/sh in net cash on the balance sheet.

They are generating about $100-$150M in free cash flow per week (over $1/sh) and ZIM is set to pay 30-50% of their 2021 earnings as a dividend, so we could see a dividend payment of $15/sh or higher early next year... all this for a stock that trades under $50!
Crazy stuff!


Q.
When do you see supply chains returning to normal in the US - if ever?

A.
I think we're probably at the peak of rates right now, and I have been advising folks of a mid-Oct to mid-Nov top for awhile.

That's simply how the seasonal cycle works!

However, things look tight through at least the Chinese New Year (February 2022), and I don't expect we'll see 'normal' situations for at least several more years *unless* we get a massive US recession, which of course nobody wants to see!

The port infrastructure and our entire supply chain (all the way down to trucks and drivers) has been underinvested for a decade straight.

We got away with it for several years, but now folks are waking up and realizing that we have a serious structural problem on our hands.

If ports are properly upgraded, rail lines are improved, and the truck/chassis situation is sorted, then we could hope for a smoother holiday season next year and ideally a 'smooth system' by 2023.


Q.
What's your 1 month, 1 year and 1 decade outlook for the sector?

A.
I know shipping is cyclical and can be tough, but do your best?

We cover 6 segments of shipping, of which container ships is just one of them- but I'll try my best on this segment.

I expect rates are topping out here within the next month, but I like the stocks because they are significantly undervalued and haven't priced in the 3-5 year leasing contracts which have been signed.

Frankly, the spot rates don't even matter anymore except for news headlines.

Over the next year, I hope to see some easing by next February and I am optimistic that we could have a smoother 2022 Holiday season, albeit I think elevated shipping costs are here to stay.

In the next decade, the focus becomes more on pending environmental regulations and how these will be implemented.

Global consolidation of liners is an obvious trend, which should lead to improved cost and capacity discipline.

I expect the 2021-2030s will look a lot more like the 2000s in terms of average shipping costs and profits as opposed to the 2010s,

which marked a horrendous downturn for the entire sector.

Too many people have the incorrect view that 2012-2018 was 'normal' for shipping.

It wasn't!

We went through a 6-year straight bear market in container ships and Americans got used to unrealistically cheap shipping costs, subsidized by endless losses by global carriers.

That era is over."

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