TOP 100 TRANSPORTATION AND LOGISTICS SITES
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| The Long Case for Horizon Lines Jackson Thies submits:Company Name: Horizon Lines, Inc. (NYSE: HRZ) Headquarters: Charlotte, North Carolina Publicly traded since September 2005 click to enlarge images Company Background & Description: Horizon Lines has provided container shipping and logistics solutions since 1956 and accounts for approximately 38% of marine container shipments between the continental U.S and the three Jones Act markets, Hawaii (market includes Guam and Micronesia), Alaska, and Puerto Rico. The company also leases and operates terminals in Hawaii, Alaska and Puerto Rico. In addition, the logistics services Horizon provides include rail, trucking and distribution (though the logistics segment is not currently profitable). Horizon is currently the only shipping company providing a single comprehensive service to all three contiguous Jones Act markets. Horizon benefits from a competitive advantage by having the ability to serve customers with shipping and logistics needs in multiple markets. This enables Horizon to negotiate larger volume discounts with inland shippers and enhances operating efficiencies. Horizon utilizes a proprietary information technology system, HITS, that was introduced in 2000. This tracks information relating to booked shipments and shipments in transport, and also utilizes an online booking system that accounts for approximately 50% of total bookings. This system generates cost savings for customers, which builds strong customer loyalty as it enables better service to customers with complicated shipping and logistics requirements. Horizon also implemented radio frequency ID tracking in 2007 enabling real time shipment tracking throughout all stages of transit. Horizon currently has 21 ships in its possession with a total carrying capacity of 44,656 TEUs (twenty-foot equivalent units). 16 of Horizon’s 21 ships are American made and Jones Act eligible; 13 are owned by Horizon and 3 are chartered, with charters expiring in January of 2015. The remaining 5 ships are transpacific with charters expiring between November 2018 and April 2019. Horizon also owns 5,397 containers of various size and type, and leases 15,393. Of the approximately 40 Jones Act vessels in operation today, Horizon controls 16; the remaining vessels are distributed amongst Matson (Alexander & Baldwin which serves Hawaii), Sea Star (Puerto Rico), and T.O.T.E. (Alaska). Jones Act: Horizon Lines is an attractive investment opportunity primarily because it is a Jones Act shipper. The Jones Act, also known as the Merchant Marine Act of 1920, is a federal statute that regulates maritime commerce in U.S. waters and between U.S. ports; it also contains provisions regarding seamen’s rights. Jones Act shippers must utilize U.S. built ships, deliver to Jones Act ports, be majority owned by a U.S. corporation, and the crew must be a minimum of 75% U.S. citizens. Foreign repair work of U.S. flagged vessels is also limited to 10% foreign built steel weight, restricting ship-owners from refurbishing ships at overseas shipyards. There are currently only a few U.S. shipbuilders which construct a very small portion of the world’s ships. Generally the only ships commissioned with U.S. shipyards are those used in U.S. shipping. The cost of construction at a U.S. shipyard is approximately double that of international shipyards and the time to delivery is in excess of 3 years. Current Operations: A significant portion of Horizon’s cargo is non-discretionary items and other goods vital to the recipient economy. While this does not completely insulate Horizon from cyclic downturns, it does mitigate the severity. Investment Thesis: Strong cash flow generation capability: Horizon generates attractive free cash flow relative to its current capitalization with an average 11.5% EBTIDA margin over the past 5 years. Historical capex is between 2% and 4% of sales, with estimated maintenance capex at 2% of sales. Revenue and cash flow protected by barriers to entry: Horizon is a Jones Act certified shipper. The process to become a Jones Act shipper is capital and time intensive. It takes a significant capital investment to purchase American made ships (at approximately twice the cost of foreign built ships), and the lead time is at least a couple years after a builder is located. The Jones Act serves to protect Horizon from the current surplus of shipping capacity worldwide (though due to the current downturn there is excess capacity in Horizon’s trade lanes) by preventing foreign (and non Jones Act domestic) shippers from entering their primary markets. While Horizon’s cash flow margins are not exceptional, they are fair. Cash flow is relatively stable, and the protection provided by the Jones Act makes the company’s cash flow more attractive and valuable than unprotected cash flows. Attractive cargo mix: A large portion of Horizon’s cargo is non-discretionary items (~44%), helping to mitigate volume declines in economic downturns like the current. Horizon is solely a shipper to the U.S. and its territories. Domestic shipping, while cyclical, is more stable than international shipping. Customer concentration/mix: No single customer accounts for more than 8% of sales and the top ten customers account for 33% of sales. Horizon has a long history with its top ten customers. The company has received multiple service awards, exemplified by their 99% customer retention rate. The average relationship length is 31 years, with the compound annual growth in revenue from the top ten customers exceeding 10%. A significant portion of customers are “big box” customers (Wal-Mart (WMT), Lowe’s (LOW), Target (TGT), etc.) and various U.S. agencies, which mitigates receivables collection risk. Significant pricing power: Over the last 3 years unit revenue per container has increased 6.7% on average. In Horizon’s most competitive market (Puerto Rico) the company has 3 primary competitors and commands 33% of the market share. Management and employees have a vested interest in Horizon’s success: Management and employees own 8.6% of the outstanding stock. Investment Risks: Antitrust investigation into pricing practices in the Puerto Rico trade lane: Mitigating factor: The investigation is still underway so any commentary would be speculative; however, the overhang of uncertainty has been a suppressor of Horizon’s stock price. Given that Horizon has good relations with the majority of its customers and provides a valuable service, a substantial fine seems to be a low probability. Even with this uncertainty, the significant margin of safety implied at the current trading price compensates investors for the risk. Further deterioration in trade lane economies and volume declines beyond current expectations: Mitigating factor: Horizon’s current plan accounts for 2.5% deterioration in volume compared to the 3.4% volume decline seen in 2008. Even though this is an extraordinary recession, Horizon has an extensive operating history in these trade lanes and knows the economics so declines in excess of 4% seem to be low probability events. The U.S. Federal Reserve and other world banks are using everything in their power to combat the global recession. The Fed in particular has been engaging in quantitative easing and implemented numerous programs to increase credit flow and stimulate the economy. The Obama administration is also implementing an aggressive spending plan expected to begin in 2009 with maximum spending achieved in 2010. The estimated amount of spending targeted at Horizon’s end markets is $10.6 billion (Alaska $1.0 billion, Hawaii $4.6 billion, Guam $48 million and Puerto Rico $5.0 billion). While the expenditures do not guarantee an increase in spending or shipment volumes, it will mitigate the rate of volume decline. Financials Historical Financials (in millions except per share data):Complete Story » seekingalpha.com |
Airlines Face Challenge in Financing Aircraft Purchases Research Recap submits: Airlines face a long term challenge in securing reasonably priced financing for aircraft purchases, according to Oxford Anaytica. “While financiers and manufacturers have announced their confidence about the state of aircraft financing, arguing that cuts in orders make remaining aircraft purchases easier to afford, the longer-term challenge is for buyers to access a steady stream of reasonably priced funding. Complicating matters is the fact that the aviation industry will call for capital above and beyond this year’s estimated 68 billion dollar bill for new aircraft — a concern not so far reflected in any funding gap calculations.”Complete Story » seekingalpha.com |
Cash for the U.S., Potential Clunkers for Everyone Else Ryan Avent submits: Lucas Davis and Matthew Kahn suggest that you can't judge America's cash for clunkers policy without considering its international impacts—and its international impacts are troubling:“Cash for clunkers” programmes can reduce carbon emissions both in the U.S. and abroad, though at a high cost to consumers in developing countries. Because retirement rates are lower in low-income countries, imported vehicles may be driven for years while such vehicles would be scrapped under the cash for clunkers programme. This programme effectively raises the price of used vehicles in developing countries. In addition to affecting greenhouse gas production, the “cash for clunkers” programme also affects average vehicle emissions in importing countries. If the exported vehicles are dirtier than the average vehicle registered in the exporting nation but they are cleaner than the average vehicle registered in the importing nation, then trade in used vehicles will reduce average vehicle emissions in both countries.Complete Story » seekingalpha.com |
UAL Corporation Q3 2009 (Qtr End 9/30/09) Earnings Call Transcript UAL Corporation (UAUA)Q3 2009 Earnings CallOctober 20, 2009 2:00 pm ETComplete Story » seekingalpha.com |
Shipping Stocks and the Final Nail in the Coffin for Deflationists Thomas MacLeod submits:Evidence suggests that the bullish breakout by shipping stocks is far from being just another lesson in random noise. We approach the investment case for shipping stocks from a number of perspectives, namely the behavior of: Shipping (the Lloyds List 50) and shipbuilding stock prices (Bloomberg World Shipbuilding Index)absolutely and relative to the MSCI World Index,Freight rates (Baltic freight rates in particular the Handysize Index),Timecharter rates (ConTex),Spot Metals (CRB), Iron Ore and Coal rates.Bunkers prices (as in the black grunge they burn),Fundamental valuations (P/book etc.),The degree to which the industry remains out of favor with analysts (they are even more lowly rated than US Regional Banks).From the graphs below it would appear that momentum has turned positive across the board particularly over the last couple of months. Once a primary trend is in place it tends to last for months, if not years. Given bullish confirmation of indices below, it would appear that a primary bullish trend in shipping stocks has begun. Does this suggest that global growth is picking up? Given that what happens on the high seas is a leading indicator for world trade, we think so.Complete Story » seekingalpha.com |