Navios Maritime partners

The Business

NMM is a Greek operated, NYSE listed shipping company, that is incorporated in the Marshall Islands.  NMM owns 176 ships: 77 dry bulk vessels, 52 tankers, and 47 containerships. 

The Simple Value Story

NMM has total assets of $5.2B, total liabilities of $2.4B, and total equity of $2.78B.  Its current market value is $1.0B.  NMM has a tangible book-to-market of 2.7.  At year end it had approximately $300m in cash and equivalents.

During Q4, 2023, NMM’s net income was $89m.  In 2023 net income of $433m.  Its P/E ratio is currently 2.7.

NMM has leased out 63% of its total capacity for the next year at fixed, elevated rates. 

During the Q4 conference call the CEO indicated that due to shipping issues in the Red Sea and the Panama Canal, prices have remained relatively elevated compared to the typical Q1.

NMM is slowly replacing its older fleet with newer vessels.  Before purchasing a new vessel, NMM is leasing out the capacity for up to five years at fixed rates.

NMM has targeted a net debt to total asset value ratio (LTV) of 20% to 25%.  From the end of 2022 to the end of 2023 the LTV dropped from 45% to 38%.  If earnings remain strong NMM will achieve its target in a couple of years.

NMM is a very cheap stock based on every objective crietia: High book-to-market, low P/E ratio, projected future elevated profits, a declining leverage ratio. NMM is very well operated. There is no threat that shipping is in decline.

Discussion

Shipping is a capital-intensive industry that is exposed to all manners of economic fluctuation.  While NMM appears to be well-run, it has very little protection from changes in the global economic conditions.  This is a firm in perfect competition.  It will survive if it remains well-run and can last through prolonged economic downturns.  A review of the Baltic Dry Index demonstrates that shipping rates can remain low for extended periods of time.

Current shipping prices are somewhat elevated, but not particularly off-trend.

Ship construction capacity has declined over the last 10 years and may currently be below replacement rate.  I don’t view this situation as binding in any long-term sense, but it may help to maintain the current elevated prices for an extended time.

It appears to me that NMM is doing a good job of balancing two somewhat conflicting objectives.  First, to make as much money as possible when rates are elevated.  NMM is locking in these elevated rates by signing 5-year contracts.  Second, to survive the downturns, and perhaps even profit from downturns.  The long-term contracts will provide extended profitablity during the downturns.  Paying down outstanding debt will enable surviving the downturns.  Having excess cash will ensure survival during the next economic downturn and perhaps enable the purchasing of additional ships at distressed prices.

One reason the stock price is so low is that the CEO has made decisions in the past that did not seem like they were in the long-run best interests of current shareholders.  In particular, she issued shares during the last downturn, at very low prices, to purchase other corporate entities in which she had a personal involvement.  In short, the CEO had poor incentives and questionable capital allocation, despite being a very good manager.

The CEO recently completed a ‘take-under’ of Navios Maritime Holding in which she owned 64% of the company. Whilte there is some concern that she could attempt a similar manuever with NMM, the manuver may explain some of her past actions, and improve her incentives to increase the stock price for NMM in the future. The CEO recently completed the outright purchase of Navious Maritime Holdings in which she had a prior 64% interest. One of the main assets owned by Navious Maritime Holdings was 10% of the outstanding shares of NMM. So, the price of Navious Maritime Holdings was directly related to the price of NMM. By keeping the price of NMM low, the CEO was able to pay a lower price for Navious Maritime Holdings. Under this logic, it become clear why NMM did not begin share repurchases when the price of the stock was low - because the CEO wanted to keep the share price low. With the pruchase of Maritime Maritime Holdings complete, the CEO’s share of of outstanding NMM shares has increased from 5% to 15%. This seems like an obvious time for NMM to begin repurchasing share - it will drive the share price higher, it will increase the CEO’s wealth, and it will increase the CEO’s share of the company. (NMM approved $100m for share repurchases in 2021. To date not a single share has been repurchased.)

Valuation

The most straightforward way to value a firm in a competitive industry is at tangible book value. As stated previously, the tangible book value is $2.7B.  There are currently 30.2m shares outstanding.  At a book-to-market of 1, the price per share would be $89.45, an increase of 170% over the current price of $33.

In support of this valuation is that the global shipping industry is generally performing well; by this I mean profitable. Often when companies are severely undervalued relative to their book value it is because they are losing money. That is not the case here. Furthermore, to the extent that NMM is earning very elevated profits, the tangible book value will improve over the next few quarters. Finally, given that NMM has contracted out 63% of its capacity over the next year, and it is purchasing ships and contacting out up to five years in the future, there is a good chance that profits will continue over the short term. Again, any increased earnings will improve tangible book value.

Given the cyclical nature of shipping, it is almost impossible to accurately forecast earnings over the next few years (this would almost always be true). But the current P/E ratio is under 3. This low P/E will certainly attract interest.

As NMM pays down its debt, earnings will increase.

NOTE: Omar Nokta, an analyst with Jefferies, estimates the value per share at $117.

Catalysts

There are no obvious catalysits. Continued elevated earnings could drive the stock price. Paying down debt will drive earnings. If NMM begins to repurchase shares it could drive the stock price.

Risks

First, the global shipping industry is cyclical. Any siginificant downturn in the global economy will negatively affect shipping and its profits.

Second, the CEO’s past behavior with respect to commond shareholders is problematic. Hopefully now that she owns 15% of outstanding shares she’ll have a strong incentive to move the share price higher. An interesting point will be when the levereage to assets reaches her stated goal of 20 to 25%. At that point, what will capital allocation be? If she begins to return capital to shareholders through share repurchases or increased dividends, then we can rest easy. If she uses the funds in ways that are beneficial to her, and counter to common shareholder interests, then it will be a signal to exit.

Conclusion

The valuation just jumps off the page: a very elevated tangible book-to-market ratio and a very low P/E ratio. These almonst never go together. Throw in relatively low and declining leverage, a well-run company, and an industry that has no obvious threats, and the price is too good to be true.

The major concerns are the CEO’s handling of future capital allocations and her treatment of common shareholders.

At this point the potential upside is well worth the risk. This is especially true because we will get some better visibility on the CEO’s intentions over the next 18 months.