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is a lessor of container ships. Twelve percent of its stock is owned by insiders. That's a huge amount.Most of the
companies in the S&P 500 are less than one-half of one percent insider owned.
Seaspan's CEO and founder, Gerry Wang, is well-connected and very familiar with the Asian markets. He has a
smart, conservative philosophy for running his company.He only buys a ship if he has at least a five-year lease agreement
already in place. Some of the leases are up to 12 years. This may limit the company's upside earnings potential if
the spot market for shipping gets tighter, but it also protects it in downturns. It grows its profits by leasing more ships,
not by taking chances on higher shipping rates that may not materialize.
The company currently has 29 vessels in the water and another 34 on order. All are on contract. Its fleet utilization
rate is 99%. Seaspan has no risk from fuel prices or labor contracts. The shipper pays all crew and fuel costs.
Seaspan Corporation (NYSE:SSW) could be a poster child for what we do at Jack Adamo's Insiders Plus . The company HATES RISK
You might say Wang has a healthy aversion to risk. If you've seen what's happening on Wall Street lately, you know
that a large part of the credit crunch stems from no one being sure if the party on the other side of a transaction will
be solvent enough to hold up its end of the deal. Seaspan was very attuned to counter-party risk long before Wall
Street got religion about it. The company only leases vessels to the 15 largest shipping firms.
Nonetheless, the crowd did what crowds do. The stock is down nearly 35% from its high, based on irrational fears
and a lack of understanding of accounting and finance.Here are the facts:
The whole shipping industry has taken a beating in the stock market due to recession fears. But a recession—which
I think is a done deal at this point—should have little or no effect on Seaspan. It has no exposure to short-term supply
and demand, or spot pricing.With its entire fleet under long-term lease, it would take more than a recession to cut
(SSW)
SAIL TO A LOW RISK 7% YIELD
into its profits. A worldwide depression is more like it. Bankruptcies in some of the strongest companies in the industry
would have to be filed for these contracts to be broken.
Is it possible? Sure, it is.And we might also get hit by an asteroid. But you don't invest based on remote possibilities;
you invest based on rational probabilities. That's how you average 18% returns year after year.
ACCOUNTING ILLITERACY
The stock also took a hit recently when it reported a big quarterly loss on mark-to-market decreases in the value of its interest
rate swaps.You should have seen the panicked articles on some of the popular investment websites.Absolutely idiotic.
The "loss" represents the change in value of the company's long-term interest-rate hedges. Since interest rates are
lower now, these swaps have less market value.Hence, the markdown.
But the swaps exist solely to stabilize Seaspan's interest expense on its fleet, making earnings more predictable. Cash
flow is not affected in the least. They're already paid for, and there's no intention of selling them.Whether they go up
or down, the company is going to make the same profit it budgeted.
That's the whole point of hedging. Excluding the swaps write-down, EPS increased 17% for the year. For a stock yielding 7%, that's an implied total return
of 24%. Over time, that should work its way to the bottom line. The company recently raised the dividend for the
third time in two-and-a-half years; so, you may even do better than that.
MORE IGNORANCE
The latest bit of "bad" news that put these shares in the bargain bin is that the company raised capital. It took out a
relatively small loan to take advantage of lower interest rates and pay off higher interest loans, adding profits to the bottom
line. It also did a secondary stock offering that increased share count by 15%.
The latter is something that often is not good news. It threatens dilution of shareholders' earnings. But, again, this is an instance
where you have to look at the individual situation. It has been Seaspan's stated policy to pay out a high portion of its earnings
in dividends.As a shareholder, I like this. I know I'm getting paid every quarter, regardless of what the market is doing.
The flip side of this, however, is that company expansion usually has to be done with new capital, rather than reinvested
earnings. But Seaspan only buys ships when it has leasing contracts in place—presumably profitable ones, as past
dividend increases indicate. Given this fact, it is safe to assume that if there is any earnings dilution, it will be modest
and temporary. Those in the know seem to think so. Insiders bought $18 million worth of Seaspan in the recent stock
offering. And remember: the company was already 12% insider owned.
If you're looking to get rich quick, this stock isn't for you. But with a current yield of 7% and long-term growth potential
conservatively estimated in the 8% to 10% range, this is a stock that fits well in the portfolio of any smart investor
who's satisfied to get rich at a steady pace and with minimal risk. I'm very comfortable in my belief that in the
next five years Seaspan will deliver total returns near our five-year average of 18%.
Buy Seaspan up to $28.
$22.9 (08/07/08)
