Shipping – An Insight into a Non‐Correlated, Undervalued, High‐Optionality Industry Group
What’s more comfortable than wondering when Google or Facebook growth will slow, or when their valuations might contract?
Marine drilling and shipping are among the most depressed industries in the world. Lease rates for transporting various raw materials are down over 40% from year-end 2013. The number of offshore drilling rigs has declined by over 80% since 2004. Many shipping companies have become either insolvent or are in great danger of being insolvent. The industry is consolidating and most participants cannot possibly replace their vessels.
Yet, given its importance to global trade, the shipping industry is here to stay. The stronger companies with staying power can improve their competitive positions and will emerge from this prolonged down-cycle more dominant, having acquired competitors and streamlined their businesses. Either the crisis will continue, in which case the strongest companies will only become more dominant, or the crisis does not continue, in which case they will see increased profitability. That is a powerful combination if they presently trade at prices that are not reflective of any recovery, because it means one can hold, effectively, a long term call on what would typically be a multiplicative set of increases in recovery mode (order increases x price increases x margin increases and valuation multiple expansion).