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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (44700)	9/30/2011 1:02:47 PM
From: Sergio H	1 Recommendation Read Replies (1) \| Respond to of 78666

Good article: The Value of Projected Dividends seekingalpha.com

To: Paul Senior who wrote (44700)	9/30/2011 3:51:38 PM
From: Paul Lee	Read Replies (1) \| Respond to of 78666

VSEC- anyone still following ? huge contract VSE Corp., Alexandria, Va., is being awarded a $277,926,039 cost-plus-award-fee, indefinite-delivery/indefinite-quantity contract for continuous lifecycle support of naval vessels bought, sold, or otherwise transferred to Foreign Military Sales customers through the International Fleet Support Program. The services provided to foreign customers and allies under this contract include design, configuration management, field engineering, maintenance planning, maintenance, spare parts support, training, casualty, and depot-level repair. The contractor will provide engineering, technical, procurement, logistics, test, inspection, calibration, repair, maintenance, equipment upgrade installation, and overhaul support services ï¿½ including reactivation to safe-to-sail status. No funds are being obligated at this time. This contract includes options, which, if exercised, would bring the cumulative value of this contract to $1,503,446,270. This contract involves Foreign Military Sales. Work will be performed in Alexandria, Va., and in various locations throughout the world as required by Foreign Military Sales customers. Contract funds will not expire at the end of the current fiscal year. The contract was competitively procured via the Federal Business Opportunities website, with two offers received. Naval Sea Systems Command, Washington, D.C., is the contracting activity (N00024-11-D-4229).

To: Paul Senior who wrote (44700)	9/30/2011 9:25:22 PM
From: J Mako	2 Recommendations Read Replies (4) \| Respond to of 78666

re: dry bulk and DSX Paul, how do you analyse the dry bulk players? I spent some time in May trying to understand them. But eventually I concluded they don't lend themselves to analysis. Here are bits and pieces derived from what I wrote down in my notes in May. I'd like to hear your and other's opinions. ===== Shipping is a commodity business. Charter rates are at the mercy of supply and demand of the ships. Supply/demand curves from M. Stopford's "Maritime Economics": Demand is driven by worldwide economy. It is pretty inelastic (i.e. insensitive to charter rates). As the worldwide economy grows or shrinks, the demand curve moves left or right. Supply curve has a "hockey stick" shape. Say we are now at the equilibrium point at freight rate $15k. When demand shrinks, there are more ships then needed in the sea. Freight rates drop. There is a floor to the rates as there are minimum fix costs to run the ships. In short-term ship owners can do 2 things: (1) cruise the ships at slower speed to save fuel consumption and/or (2) lay-by the ships or send the ships to drydock for maintenance. Both will reduce the effective number of ships in the fleet, but not by a huge margin. In the opposite scenario: when demand grows beyond the size of the fleet. Since new ships can't be added to the fleet at wish, freight rates skyrocket. Hence, the almost vertical slope at the right. And this can happen in very short time, in the order of weeks/months as seen in the past. The figures in the graph are in scale and real. Freight rates can go from $6000 to $44,000 within months. The above are the short-term dynamics. In long-term, when demand grows, ship owners become optimistic and start ordering new ships. However, a new ship take 1-3 years to build. Besides, shipbuilders have finite capacity. By the time the shipbuilders expand their shipyards and new ships are built, the demand is no longer there. We now have an oversupply of ships and freight rates tumble. At this point, some ship-owners will start scrapping their old ships (age > 25 years old) for the steel. This will permenantly remove the ships from the fleet. Eventually, the equilibrium will tip the other way and the cycle restarts again. Historically, shipping cycles last for 8 years on average. We of course can't assume it's like a clockwork ticking every 8 years. But this gives us a sense of the time scale. Because of these structural reasons, the magnitude of boom and bust cycles is extraordinary. BDI was at its highest 11,000 in mid-2008 before the GFC, tumbled to 700 in Dec 2008, recovered to 4,600 in Nov 2009 and is now hovering around 1,270. At the moment there is an oversupply of dry bulks. Even scrapping rate has picked up a lot, it still can't counteract the rate new ships rolling off the shipyards. The important implications of all these are: Everything is driven by supply/demand: Supply/Demand drives charter rates; charter rates drive ship prices; ship prices drive scrap values; historic ship prices drive book value. All of them are moving target. Book value is misleading because we are looking at the historic prices the shipbuilder paid at particular points in the cycle which are no longer relevant. Mark to market and scrap value are also not useful because both are sensitive to present charter rates. Because the industry is in constant boom and bust and the shipowners' earnings swing hugely, it is not meaningful to talk about "average earning in normal business environment" in Graham/Buffett's context. EPV analysis is meaningless. Conventional metrics like ROA and Profit Margin are also not useful. The denominator in ROA is very sensitive to the timing the ship were purchased. At the same time, since shipowners can decide between locking in the revenue using time chartering or gambling on the spot market, the numerators in the ROA and profit margin are sensitive to the timing of these decisions. Dividend yield and earning yield are not useful. Once the time charters expire, they can fall off the cliff. In short, I can't find something on which I can anchor the valuation. My best attempt is to treat the ship prices and scrap prices at the height of GFC as the floor and calculate the liquidation value of the shippers. As in May, only PGRN, NM and DSX have positive value. I reckon the way to play the dry bulk game is to find a shipper which has strong liquidity, cashflow and no threats from debt convenants to go through the hard time has limited exposure to counterparty risk. Because of the high concentration of clients (i.e. the charters), any single failed one will have huge impact on a shipowner's time charter income. So we need to verify its charters financial strength. (In Feb, a Korean charter went into bankruptcy protection and affected a few US shippers.) has a liquidation value above its share price. has meaningful exposure in spot charter so that once the industry recover, it will take advantage of the higher charter rates has meaningful exposure in Capesize because its charter rates swing the most Apparently, DSX is the safest bet. But it doesn't have much exposure to spot charter. So, when the industry recovers, it doesn't get the ten bagger return we need to compensate for the risk we take.