Costamare Stock: Benefiting From The Commodity Environment (NYSE:CMRE)
Costamare (CMRE) is a company we first covered when the markets were dying. It has since returned over 200% thanks to a combination of factors in addition to an overall market rally.
Although the current results reflect the rise of the cycle where the S/D dynamics in the containership and logistics market are reflected more deeply, there is still reason to believe that the situation will continue to remain solid. While valuation no longer implies a particularly attractive situation, CMRE is a hold despite rising prices due to potential catalysts on the horizon that offset some other risks. Additionally, rising prices have reduced dividend yields, making CMRE no longer a high-priority income game, but passable nonetheless.
First, a Q3 look
Shipping trends have been very attractive. There has been a continuous reversal in scrap rates which peaked a few years ago, particularly under IMO regulatory changes, creating a significantly constrained supply situation.
While the benefits of limited shipping supply along with IMO changes also slowing routes and making charters less available have already started to have a positive impact on rates, COVID-19 and the situation commodity post-COVID has only boosted them further. . In the case of dry bulk shipping, infrastructure works and generally increased demand for goods versus services have resulted in the current situation where bulk cargo requires an exceptional level of vessels, causing rates to skyrocket. chartering at the levels seen above. Port inefficiencies and general logistical constraints were a boon for one company, driving a triple-digit increase in share price and EPS of 517%. As fleets are renewed with more modern and compliant ships added to fleets, the time it takes for new builds means there will be a lag for when fleets actually start to grow to the extent that this will start to affect rates in terms of supply dynamics.
On the demand side, although we have had massive price increases for many commodities, some key commodities have seen substantial setbacks in price and volume. It is issues like these that are potential risks in production, trade and shipping. In particular, iron ore has suffered as China has reduced the activity of its steel mills in order to reduce pollution. This means that the speed of iron ore entering China has dropped. Although there are many other products that can still be transported, the recovery of iron ore would help prolong the current rise in charter rates. We believe that steel mill price caps will be rolled back once the spotlight leaves China after the Olympics, and that sustained infrastructure-driven demand for iron is likely to drive prices up, perhaps more moderately, to the future.
Risks and Conclusions
In addition to the typical cycle risks, to which the CMRE is exposed in particular due to the operational leverage, the sanctions that could result from this in the event of an invasion of Ukraine by Russia also constitute a risk for trade, and therefore for the companies. maritime. However, the situation of dry bulk transport, as we mentioned in our original thesis in 2020, is mainly related to supply dynamics, where exceptional supply pressure due to years of non-profitability of the sector led to the demolition situation and consequent lack of ships that we see today. These supply constraints are expected to last longer than normal due to long lead times due to inflationary pressures and shortages of various commodities. The general rule is that it takes about 2 years for the production capacity to increase. As the recovery in investment is only recent, we can expect the next few quarters to remain exceptional before the risks of the cycle appear. Indeed, in the commodity-intensive economy brought about by COVID-19, demand factors may delay this cycle reversal. While the outlook for CMRE in the short to medium term remains excellent, we believe that current prices, with a P/E around 6.3, are beginning to reflect a fuller multiple. While there is likely still upside potential, with a 6.3 P/E implying a substantial earnings yield, and with two years guaranteed in terms of earnings payback period on the price, we are starting to look elsewhere in the markets, where operating cycle and leverage risks do not. interacting just as viciously, for the next big opportunity.
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