Costamare shares (NYSE:CMRE) have notably rebounded in recent weeks. This can be attributed to the company’s dry bulk and container fleets, which are particularly expected to benefit from ongoing security concerns in the Red Zone. Sea, preventing the passage of ships in the Suez Canal. However, I believe the market has not fully priced the benefits of this continued disruption into the stock.
But first, let me put this story into context.
Unless you’ve been living under a rock for the past few weeks, Yemen’s Houthi rebels have not only disrupted ships trying to enter the Suez Canal, but also fired rockets directly at them. Last month, they even onboard Galaxy Leader, flagged in the Bahamas, a vehicle carrier. Watching the footage was like those videos of Somali pirates on steroids.
With attacks intensifying week later week, leading shipping companies, such as Mediterranean Shipping Company, Maersk (AMKBY), Hapag-Lloyd (OTCPK: HPGLY), and the oil company BP (P.A.) all reported being diversion ships far from the Red Sea. Trade from Asia to Europe must now be carried out via ships circumnavigating the Cape of Good Hope.
Due to an increasingly risky maritime environment, this means higher fuel costs, longer voyages and higher insurance costs. The result? Higher rates. If anyone is taking advantage of this situation, it is the shipowners, like Costamare.
What is worth noting here is that we are not used to this type of situation and therefore we may intuitively think that it will be resolved soon. For decades, traffic through the Suez Canal has been safe. So, the average person probably thinks that this situation will be resolved sooner or later. Initiatives aimed at restoring order, such as the US-led Operation Prosperity Guardian, certainly allude to this narrative.
However, the reality is very different.
Operation Prosperity Guardian failed before it even began. It quickly collapsed, Italy, Spain and France refuse to operate under American command. Who can blame them? It’s just too risky. Of course, military ships can shoot down a few drones attacking commercial ships.
But how many of them can they bring down, and what is the price? Warships carry a limited number of missiles and they are expensive. The Houthis can send an “unlimited” number of attack drones for chip swapping. A missile costs a few million dollars. A drone costs a few thousand dollars. It’s simply “not a good deal” to be in the suicide drone interception industry these days.
Therefore, even if some liners resume operations in the Red Sea, like Maersk, this is only because some of their ships have the luxury of being accompanied by American warships. This does not apply to most ships still forced to sail around South Africa.
I expect even current U.S. aid to the region to decline because it is ineffective. You can’t patrol and accompany every ship forever. It’s simply impossible. The current situation is therefore destined to last for a long time. There is simply no way to stop these attacks, and there is no incentive for the Houthis to stop them until their demands are met.
Investors in shipping understand this. Clearly, spot rates across most shipping asset classes have soared. Let’s take a look at dry bulk first. Here are the FFAs as of December 28.
January Capes above $23,000 and Cal24 at just $20,000 are very cost-effective rates.
I believe Costamare will benefit significantly from the increase in dry bulk rates. At the end of the third quarter, their 34 Newcastlemax/Capesize vessels had an average duration of 1.1 year, while their 14 Kamsarmax/Panamax ships had an average duration of 0.4 year.
These are very short durations, as is often the case in the dry bulk sector, meaning that Costamare must have already started to renew many of its charters at rates much higher than previously depressed levels .
Meanwhile, the company’s container ships, which have an order backlog of approximately $2.7 billion with a TEU-weighted life of 3.7 years, are expected to continue to produce resilient cash flows in the years to come, as has been the case quarter after quarter recently.
As soon as some of the company’s container ships begin to exit their existing charters, such as Dyros, Arkadia and Virgo, as shown below, it is highly likely that Costamare will have the opportunity to renew its employment at higher rates.
As you can see, Shanghai’s export containerized freight index jumped 40.2% week-on-week to 1,759.57 on December 29.
This trend is expected to continue as an increasing number of container ships continue to avoid the Red Sea.
Clearly, the latest data from Flexport Inc. indicates a significant change in shipping routes. Around 299 ships, with a total capacity of 4.3 million containers, have changed course or plan to do so, double the number just a week ago, representing around 18% of maritime capacity worldwide.
These new routes around Africa can take up to 25% more time than the usual shortcut via the Suez Canal. According to Flexport, that means higher shipping costs, which could lead to higher prices for consumers of various products, from shoes to food and oil, if these longer journeys continue.
I want to emphasize again that I don’t believe this will be a problem in the short term. Just last Friday (December 29), Mitsui OSK Lines (OTCPK: MSLOY) and Nippon Yusen (OTCPK:NPNYA), Japan’s largest shipping companies, also declared their ships with connections to Israel avoided the Red Sea area.
Hapag-Lloyd also said it would continue to reroute ships around the Suez Canal for security reasons.
Despite these rate tailwinds, forward EPS estimates for Costamare have not been revised upwards. Wall Street appears to be largely sleeping on the current situation in the Red Sea and the underlying corporate earnings that have been the result of the ongoing disruption.
Therefore, the stock is currently trading at around 5 times expected EPS for this year and around 4 times expected EPS for next year, based on rather pessimistic estimates, in my opinion.
At the same time, Costamare has $996.9 million in liquiditywhich equates to approximately 79% of its current market capitalization, and no significant loan/lease due until 2026. Corporate leverage based on market values also remains below 37%.
The combination of:
- A healthy balance sheet with sufficient firepower for further expansion,
- an aligned management team with 64% internal/family ownership that reinvested $149 million through Costamare’s DRIP program,
- non-dilutive financing with continuous buybacks ($60 million over the last 12 months or 5% of current market capitalization,
- cheap current and future valuation multiples,
- and the current favorable winds linked to the Red Sea which are probably not taken into account in the price of the stock,
constitutes, in my opinion, a convincing investment argument. As a result, I remain bullish on CMRE stock.
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