Navios Management Calms the Waters

 | Jan 13, 2017 | 2:00 PM EST
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I've written many columns on Navios (NM) in the past 12 months for Real Money, made Navios Maritime Holdings Preferred Series G (NM-G) my Real Money Best Idea (it's still holding the No. 1 position as you can see to the right of this article) and made Navios Holdings common stock my RM pick for Best Stock of 2017. 

Relentless cheerleading (and great returns for my clients) aside, however, I have not done an adequate job of explaining why I believe Navios is such a good long-term holding. Shipping markets, and especially dry bulk -- the core market for NM and Navios Maritime Partners (NMM) -- are notoriously volatile. A clear indication is that the Baltic Dry Index has tripled since its February 2016 lows. 

I believe dry bulk rates will continue to be supported by a book-to-fleet ratio that is at a 14-year low and a Chinese appetite for bulk commodities like iron ore and coal that has never wavered. I also believe Navios Holdings shares do not deserve the 60% discount to Navistar International (NAV) they are still being afforded by the market. So there is an argument to be made for holding NM and other dry-bulk names to play the continuation of a cyclical upswing. 

I own Navios shares not for a cyclical pop, though, but for exposure to their management team. Those managers are the smartest guys in the room in shipping. I'm using "guys" colloquially, of course, given Angeliki Frangou is the CEO of each of the Navios Group companies. I stuck with NM and NM-G through some truly ugly trading days in February through August because of my faith in that management team. 

Why are they so good? Because they can feel the market better than any other team I've met in the arena of publicly traded shipping companies. Navios Holdings provides management services not only for its core fleet, but also for each of the other group entities, including two that are not publicly traded. The knowledge gained from that breadth and depth of fleet is invaluable. 

Right now, Navios management is sending out signals that are so bullish, it makes me wonder if I should be buying more NM common shares even after their amazing four-month run. Simply put, Navios is going long. Very, very long. 

Last night, Navios Maritime Partners filed a $500 million shelf registration. This may seem curious at first since NMM is a master limited partnership, yet has not paid dividends for a year (payments were suspended Feb. 3 in the midst of the panic). Also, valuation is an issue, as NMM is trading at $1.58, whereas in the second quarter of 2015 its price range was $10.63 to $13.22. 

So why raise money? As with any MLP, Navios Partners can only grow (assuming unchanged leverage) by issuing units. And that's the key. Frangou and company clearly want to grow Navios Partners. It has an agreement with Navios Holdings that gives NM the right to drop ships down to the MLP given they are on charters of a duration of at least three years. Perhaps this shelf offering is an opening move toward such a drop-down, but it could also foreshadow NMM's purchases of third-party ships, and NMM purchased a Capesize dry-bulk ship in December. Either way, it's a clear signal that Navios management is bullish on dry bulk. 

Getting long can also be achieved without a capital raise, and Navios Holdings indicated such a strategy in its third-quarter earnings release. In the fourth and first quarters, Navios Holdings will charter-in seven additional bulkers. As a ship owner, Navios is typically in the position of chartering-out, but chartering-in allows it to fix a cost and capture the upside from rising freight rates. So, with those new boats in the fleet, NM's chartered-in fleet will be two-thirds the size of its owned fleet. 

So I look at freight rates that are light-years ahead of where they were at this time last year and ask myself, "Is this as good as it gets ... should I sell Navios?" Navios management knows so much more about the shipping markets than I ever will, however, so their raging bullishness makes me answer my question with a resounding "No!"

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