Navios Maritime Holdings (NM) reported second-quarter earnings yesterday and the release and subsequent call were completely characteristic of a company that is managing rough end-markets with aplomb.
Navios doesn't receive much sell-side coverage, but the stock slipped initially as the headline EPS and EBITDA figures were short of what passes for Street expectations (they were also below the figures I had modeled). Further analysis showed that the shortfall was caused by the sale of a ship by an affiliate that was announced after the quarter ended.
So, a little messy, but -- no doubt due to my cursing and throwing objects for the first half hour of yesterday's trading session -- the shares of both Navios' common and preferred came off their lows and finished on an uptick.
Navios CEO Angeliki Frangou's message on the conference call could be summarized in two bullets (I have them written in ALL CAPS in my notes).
- Dry bulk shipping markets have stabilized.
- Dry bulk vessel asset values have risen off the bottom.
So, as a long-term shareholder (my firm owns the preferreds and, as you'll see to the right of this column, they have performed quite well since I made them my Real Money Best Idea in January) that is exactly what I needed to hear.
As a preferred shareholder, the key factor is always a company's bond pricing and as Navios 2019 Senior Notes rose from 37 cents in late June to 60 cents in early August (they closed at 58 cents yesterday), I had a hunch who was buying. My suspicions were confirmed yesterday, as Navios confirmed that the company bought $32 million in face value of those bonds for an average price of just under 50 cents on the dollar after the end of the second quarter.
Again from my notes and in all caps:
- They are buying back their bonds.
It's a clear sign that management is much more confident in the company's credit performance than the bond markets -- and by association the equity markets -- are showing in their valuation of Navios' paper. It's money where the mouth is and it's all I needed to hear. Navios preferreds' will remain my firm's core holding.
An investor can't live in a bubble, of course, and one has to watch the end markets. In Navios' case the key market indicator is the Baltic Dry Index. I ran some numbers on the average figures for the BDI and it's clear that, as Frangou asserted, shipping markets have indeed stabilized. The average figures for the BDI are as follows:
1Q2016: 357
2Q2016: 604
3Q2106: 687
Yesterday's print on the BDI was 718, so the uptrend is clear. That said, on Aug. 20 last year, just before the Flash Crash, the BDI was trading at 1014. So clearly, there is still upside in freight rates as markets revert to historical mean prices for shipping iron ore, coal and grain cargoes.
The JCB, Draghi and Yellen (I'm as interested as anyone to hear her thoughts from Jackson Hole today) get all the media attention, but it was China's stimulative actions that brought the commodity and commodity shipping markets off their bottoms in February and the global equity markets followed. Navios management remains very bullish on the pace of coal and iron ore imports into China, so there's no sign that the stimulus is being removed.
As our 40th president liked to observe, a rising tide lifts all boats and clearly Navios is benefiting from a better environment for global shipping and my clients and I will continue to hold the name.
