3x EPS stock that trades under 0.5x book value with almost all of its earnings locked in for the next three years, actively buying back stock and increasing its dividend
It looks like they announced a syndicated loan up to $850M to fully fund their newbuild program (compared to the $1,100M you had estimated, if I'm interpreting correctly).
Thank you! I understood it as they will use $850m proceeds to finance it, with the rest being funded in cash. However, when I read the company's Q4 transcript, it does seem like it is $850m of obligation:
'On 7th of February 2025, we entered into an $850 million syndicated loan facility agreement to finance all of our remaining new building container vessels including the two additional recent orders, all of which have deliveries between 2026 and 2028. '
We will know the exact amount when the 20-F comes out. But if it is 850m vs my 1,100m, that's incrementally positive.
To close the loop; obligations left related to the newbuild program is $1257m for 16 ships. My $1100m math was for 15 ships. Looks like they added one more. I wasn't too far off
Capital-intensive, fiercely competitive, commodity (price-taker) business. No moat! Rusting hulls is the shipping equivalent of a melting ice cube. The history of this type of businesses is nothing but value destruction. All the things one does not want in an investment.
See, that's what everyone keeps saying. But I disagree... OK, maybe I agree, but I'd qualify that price could be any rational number. Some "assets" are worth zero. Some are worth less than zero due to opportunity cost, headache, inconvenience, lack of sleep...
Granted that assets may be worth different things to different people. So maybe I should qualify it further. To me, this business is worth no more than zero and likely less.
Critical it’s probably not worth the time to comment when you know nothing about the industry. Those “rusting hulls” have significant scrap value once they get retired, so that melting ice cube doesn’t melt all the way.
I won't respond to an ad hominem this time, focusing instead on the point - but if you are OK with spraying liquids against the wind, it's your prerogative.
That melting ice cube does not melt all the way (I never said rusting hulls are worth zero to everyone - just to me), but it does melt. Ships depreciate fairly rapidly due to age and accumulating damage. I don't think anyone will argue with that.
You also did not have a counterpoint for my statement that shipping is a capital-intensive, fiercely competitive, commodity (price-taker) business without a moat. And you won't - because there isn't a good one.
I can show you multiple capital destroyers in the shipping business. Can you show me a compounder here?
Apologies, I assumed you really were a shipping newbie just making a statement they didn’t understand.
I agree that the industry is very tough and not a place for long term compounding as an investor. But when the valuations are totally in the toilet and the cycle is in your favor they can be great trades.
The business is not worth less than zero, no matter how you spin it. They own assets that there is an active market for and could sell for well in excess of their liabilities - and moreover, they have those assets contracted out to earn a fair bit of cash over the next few years. In isolation, that is objectively worth something. Disagreeing with that is disagreeing that 1+1=2.
Whether the shares have any value is a different question, as it depends on what management decide to do with those cash flows. I don’t know the company well so I can’t speak to that - you’d think owning almost half the shares would be sufficient incentive to make per-share value-accretive decisions, but looking at the long term chart that doesn’t seem to have happened, for whatever reason.
'but looking at the long term chart that doesn’t seem to have happened, for whatever reason.'
I think that is the shortcoming sometimes of looking at the chart. It hasn't happened because into their IPO in 2006, the shipping sector as it was known ended and the company had IPo'ed with 6x+ leverage. From 2009 to 2020, the management has been steadfast focused on deleveraging, bringing their leverage from a peak of 8-9x to now basically 0.5x. Many greek shipping companies simply bankrupted the public entity and re-emerged with their fleet, unscathed. They hosed all investors. Danaos instead did right by its shareholders; slowly paid down debt and put itself in a better position longer-term
Only in 2020/2021 were they allowed to finally start distributing capital to shareholder. And since, they've increased the dividend consistently every year, have been actively buying back stock, and are positioning the business to weather any environment
They announced an additional 100M buy back yesterday which as of today’s price, would decrease the S/O by around 1.3M (~7%).
Being conservative and anticipating revenue equal to FY ‘24, that brings the EPS to around $29 and they’d be trading around 2.65x earnings. If they keep the payout ratio flat, the div yield jumps to just below 5% at todays price. Although, I imagine given the high FCF yield, and the fact that they front loaded much of their capex last year, we should see some more of that cash flow returned to investors, whether that’s through a dividend hike (which they’ve done the past 4 years), or more buy backs.
Since Costas now owns more than 50% of S/O, he’s highly incentivized to return capital to investors, rather than just letting the balance sheet grow. Hopefully some guidance on how they plan to use their FCF will be a catalyst for the market to realize their fair value.
DAC: As of the latest 13D filed on April 9th, shares outstanding was 18.45m shares. As you rightly point out, they'd buy another 1.3m shares at current prices. Assuming adjusted net income is flat vs 2024 (532.4m), I get to $31 EPS with even higher FCF
Given the strength in charter rates, the company will likely have chartered a significant portion of its 2027 revenue by Q1 and even more so by Q2, securing $25+ in EPS as well. Then, new ships come online in mid/late 2027, which would offset weakness if the markets remained weak for the next 2.5-3 years.
Knowing Danaos' management, they will likely maintain a balanced approach: They will continue buying back stock at a steady pace, increase the dividend slightly or maybe faster, and invest where appropriate to renew some of their older ships.
If my last statement remain true, the stock will slowly re-rate as BV continues to grow. The discount to BV is unsustainable, especially when BV+Dividend is accreting at $7+ per quarter.
Also, steel prices are rising, supporting scrap value of their older ships.
I used a slightly higher share count which accounted for some of the differences in our calculations, but not all. Regardless, I think you found a diamond in the rough here.
I find it interesting that the street tends to value companies with a predictable revenue so highly, yet DAC is trading at 2.9x right now, and 2.7-2.6x after the buy backs. It may be a cyclical industry, yet they have over 2x their market cap in back logged revenue of 3.4B with 50% margins, for the next couple years. What else are they going to do with cash except return it to shareholders, which over 50% of is the CEO and managing director's share in Costas?
The div payout ratio is 12% or so right now, if they increased that to just 20% (which is still extremely low for value stocks), the yield would be 7.6% assuming no rev growth.
What happens to that other 80%? Buy backs? Paying off debt? Front loading payments from increasing the fleet size by buying more ships to increase rev in the future?
Whatever it is, it will increase future shareholder value. At some point, they need a catalyst to realize the true intrinsic value of the stock, which I think is showing share holders they're committed to returning value to them. Costas takes a pretty low salary (All of the directors take around 2.4M combined), so he'll benefit from any decision that benefits share holders more than anyone.
Nice write-up! I also love the revenue visibility and the very cheap price.
I do think your scenario for 2027 - 2032 is overly conservative. We've seen significant inflation since 2019 and new build costs are up significantly. This has an impact on rates as anyone ordering a ship needs to earn a return on that capital. I'm not saying that current rates are sustainable, but I think 2019's rates are too low to use as a realistic scenario. Arguably as a severe downside scenario. But I also think that their 2,200 TEU smaller vessels are nearing the end of their lives (close to 30 yrs old now) which should result in them being sold or scrapped so that should be factored in.
Something that I think people have missed about Danaos is how disciplined management has been in deploying capital. Everyone says "just pay me all the earnings" and as a short-term oriented shareholder that would be great. But they've maintained a long-term view and almost all new ships they've ordered (except the 2 very latest orders recently announced) are contracted out for 3 - 5 years (mostly 5 years). That gives them great certainty, reduces risk, and I estimate the rates they've secured give them about 10% - 12% returns on capital and closer to 15% returns on equity (given the debt financing). This is certainly far from bad - in fact exactly what you'd want management to do in taking advantage of a higher rate environment and locking those rates in far into the future.
Of course as you mention the industry order book is worrying and the Red Sea issue could be resolved which would put downward pressure on rates. But the revenue certainty makes these problems that only really start to impact earnings from 2027 by which time they've earned 2/3rds of their market cap in cash.
I agree with all your points, especially re: management and inflation. I think I wanted to be overly conservative simply to showcase how little you need to win with with one
The 2200 TEU ships will be scrapped only if the charter rate market goes into a downturn, in my opinion. Otherwise they will make them last as long as possible. Hard to quantify the scrap value, but is it material? Unlikely.
At this rate, even 2027 will be locked in. We are almost in march and the HARPEX index remains at an all time high
The company has minimal ongoing capex. Lessees bear almost all the costs. Danaos would only incur capex if it makes an active decision to modify the ship or buy a new ship. Some costs are capitalized and flown-fhrough the P&L like Dry-docking, but I did not factor those in my D&A (it's not overly material anyway)
Ultimately, the FCF calculation I made is simply to showcase the near-term FCF generation because their fleet is young. If you want to be conservative, over the long-term, FCF will roughly equal NI. That's because the cost of a newship should be seen as ongoing capex as their current ships need to eventually be retired.
As I said, leases cannot be resiliated, even for newbuilds. The only time it has happened in the industry is when the customer goes bankrupt. This is how Danaos received equity stake in Shipliner ZIM.
Why not just pay out all earnings? I wish they did, but they don't, unfortunately. Danaos has decided to approach it in a balanced way; grow the dividend, buyback stock, and invest in the fleet or buy new segments like Drybulk when the market is in the gutters and they think they can generate outsized return by buying ships below well below market value.
I personally think using all your cash to buyback stock in a cyclical industry is not the proper approach. Balanced approached makes sense. Certainly they could be more aggressive, but I've seen many cyclical companies do big buybacks right before an industry implosion and now they are on the verge of bankruptcy ( many retailers like Sleep Number, Big Lots, come to mind)
Thanks for the write-up- great profile.
It looks like they announced a syndicated loan up to $850M to fully fund their newbuild program (compared to the $1,100M you had estimated, if I'm interpreting correctly).
Source: https://www.shippingherald.com/danaos-profitability-remains-consistent-2-newbuilding-containerships-added-to-orderbook/#:~:text=firepower%20to%20explore%20accretive%20investments,of%20all%20vessels%20on%20order
Thank you! I understood it as they will use $850m proceeds to finance it, with the rest being funded in cash. However, when I read the company's Q4 transcript, it does seem like it is $850m of obligation:
'On 7th of February 2025, we entered into an $850 million syndicated loan facility agreement to finance all of our remaining new building container vessels including the two additional recent orders, all of which have deliveries between 2026 and 2028. '
We will know the exact amount when the 20-F comes out. But if it is 850m vs my 1,100m, that's incrementally positive.
Ah that makes sense. In any event, the investment case is compelling.
To close the loop; obligations left related to the newbuild program is $1257m for 16 ships. My $1100m math was for 15 ships. Looks like they added one more. I wasn't too far off
Ticks three of my boxes: cheap, hated and in an uptrend.
Capital-intensive, fiercely competitive, commodity (price-taker) business. No moat! Rusting hulls is the shipping equivalent of a melting ice cube. The history of this type of businesses is nothing but value destruction. All the things one does not want in an investment.
Every asset has a price, even rusting hulls.
See, that's what everyone keeps saying. But I disagree... OK, maybe I agree, but I'd qualify that price could be any rational number. Some "assets" are worth zero. Some are worth less than zero due to opportunity cost, headache, inconvenience, lack of sleep...
Granted that assets may be worth different things to different people. So maybe I should qualify it further. To me, this business is worth no more than zero and likely less.
Agree to disagree then.
Critical it’s probably not worth the time to comment when you know nothing about the industry. Those “rusting hulls” have significant scrap value once they get retired, so that melting ice cube doesn’t melt all the way.
I won't respond to an ad hominem this time, focusing instead on the point - but if you are OK with spraying liquids against the wind, it's your prerogative.
That melting ice cube does not melt all the way (I never said rusting hulls are worth zero to everyone - just to me), but it does melt. Ships depreciate fairly rapidly due to age and accumulating damage. I don't think anyone will argue with that.
You also did not have a counterpoint for my statement that shipping is a capital-intensive, fiercely competitive, commodity (price-taker) business without a moat. And you won't - because there isn't a good one.
I can show you multiple capital destroyers in the shipping business. Can you show me a compounder here?
Apologies, I assumed you really were a shipping newbie just making a statement they didn’t understand.
I agree that the industry is very tough and not a place for long term compounding as an investor. But when the valuations are totally in the toilet and the cycle is in your favor they can be great trades.
The business is not worth less than zero, no matter how you spin it. They own assets that there is an active market for and could sell for well in excess of their liabilities - and moreover, they have those assets contracted out to earn a fair bit of cash over the next few years. In isolation, that is objectively worth something. Disagreeing with that is disagreeing that 1+1=2.
Whether the shares have any value is a different question, as it depends on what management decide to do with those cash flows. I don’t know the company well so I can’t speak to that - you’d think owning almost half the shares would be sufficient incentive to make per-share value-accretive decisions, but looking at the long term chart that doesn’t seem to have happened, for whatever reason.
'but looking at the long term chart that doesn’t seem to have happened, for whatever reason.'
I think that is the shortcoming sometimes of looking at the chart. It hasn't happened because into their IPO in 2006, the shipping sector as it was known ended and the company had IPo'ed with 6x+ leverage. From 2009 to 2020, the management has been steadfast focused on deleveraging, bringing their leverage from a peak of 8-9x to now basically 0.5x. Many greek shipping companies simply bankrupted the public entity and re-emerged with their fleet, unscathed. They hosed all investors. Danaos instead did right by its shareholders; slowly paid down debt and put itself in a better position longer-term
Only in 2020/2021 were they allowed to finally start distributing capital to shareholder. And since, they've increased the dividend consistently every year, have been actively buying back stock, and are positioning the business to weather any environment
Appreciate the explanation - makes the stock a lot more interesting to me. Will stick it on my list, cheers.
They announced an additional 100M buy back yesterday which as of today’s price, would decrease the S/O by around 1.3M (~7%).
Being conservative and anticipating revenue equal to FY ‘24, that brings the EPS to around $29 and they’d be trading around 2.65x earnings. If they keep the payout ratio flat, the div yield jumps to just below 5% at todays price. Although, I imagine given the high FCF yield, and the fact that they front loaded much of their capex last year, we should see some more of that cash flow returned to investors, whether that’s through a dividend hike (which they’ve done the past 4 years), or more buy backs.
Since Costas now owns more than 50% of S/O, he’s highly incentivized to return capital to investors, rather than just letting the balance sheet grow. Hopefully some guidance on how they plan to use their FCF will be a catalyst for the market to realize their fair value.
DAC: As of the latest 13D filed on April 9th, shares outstanding was 18.45m shares. As you rightly point out, they'd buy another 1.3m shares at current prices. Assuming adjusted net income is flat vs 2024 (532.4m), I get to $31 EPS with even higher FCF
Given the strength in charter rates, the company will likely have chartered a significant portion of its 2027 revenue by Q1 and even more so by Q2, securing $25+ in EPS as well. Then, new ships come online in mid/late 2027, which would offset weakness if the markets remained weak for the next 2.5-3 years.
Knowing Danaos' management, they will likely maintain a balanced approach: They will continue buying back stock at a steady pace, increase the dividend slightly or maybe faster, and invest where appropriate to renew some of their older ships.
If my last statement remain true, the stock will slowly re-rate as BV continues to grow. The discount to BV is unsustainable, especially when BV+Dividend is accreting at $7+ per quarter.
Also, steel prices are rising, supporting scrap value of their older ships.
I used a slightly higher share count which accounted for some of the differences in our calculations, but not all. Regardless, I think you found a diamond in the rough here.
I find it interesting that the street tends to value companies with a predictable revenue so highly, yet DAC is trading at 2.9x right now, and 2.7-2.6x after the buy backs. It may be a cyclical industry, yet they have over 2x their market cap in back logged revenue of 3.4B with 50% margins, for the next couple years. What else are they going to do with cash except return it to shareholders, which over 50% of is the CEO and managing director's share in Costas?
The div payout ratio is 12% or so right now, if they increased that to just 20% (which is still extremely low for value stocks), the yield would be 7.6% assuming no rev growth.
What happens to that other 80%? Buy backs? Paying off debt? Front loading payments from increasing the fleet size by buying more ships to increase rev in the future?
Whatever it is, it will increase future shareholder value. At some point, they need a catalyst to realize the true intrinsic value of the stock, which I think is showing share holders they're committed to returning value to them. Costas takes a pretty low salary (All of the directors take around 2.4M combined), so he'll benefit from any decision that benefits share holders more than anyone.
Nice write-up! I also love the revenue visibility and the very cheap price.
I do think your scenario for 2027 - 2032 is overly conservative. We've seen significant inflation since 2019 and new build costs are up significantly. This has an impact on rates as anyone ordering a ship needs to earn a return on that capital. I'm not saying that current rates are sustainable, but I think 2019's rates are too low to use as a realistic scenario. Arguably as a severe downside scenario. But I also think that their 2,200 TEU smaller vessels are nearing the end of their lives (close to 30 yrs old now) which should result in them being sold or scrapped so that should be factored in.
Something that I think people have missed about Danaos is how disciplined management has been in deploying capital. Everyone says "just pay me all the earnings" and as a short-term oriented shareholder that would be great. But they've maintained a long-term view and almost all new ships they've ordered (except the 2 very latest orders recently announced) are contracted out for 3 - 5 years (mostly 5 years). That gives them great certainty, reduces risk, and I estimate the rates they've secured give them about 10% - 12% returns on capital and closer to 15% returns on equity (given the debt financing). This is certainly far from bad - in fact exactly what you'd want management to do in taking advantage of a higher rate environment and locking those rates in far into the future.
Of course as you mention the industry order book is worrying and the Red Sea issue could be resolved which would put downward pressure on rates. But the revenue certainty makes these problems that only really start to impact earnings from 2027 by which time they've earned 2/3rds of their market cap in cash.
I agree with all your points, especially re: management and inflation. I think I wanted to be overly conservative simply to showcase how little you need to win with with one
The 2200 TEU ships will be scrapped only if the charter rate market goes into a downturn, in my opinion. Otherwise they will make them last as long as possible. Hard to quantify the scrap value, but is it material? Unlikely.
At this rate, even 2027 will be locked in. We are almost in march and the HARPEX index remains at an all time high
Great write up..
However, after reading below book I am a bit of a skeptic 🤨
FCF = NI + D&A assumes there is not capex? Is all capex shoulders by the operators for signed leases currently?
Can the leases be canceled or renegotiated? Esp. for new builds?
Why not just pay out all earnings (if it is real earnings and possible/allowed)? Stock would certainly trade higher....
https://searching4value.wordpress.com/2022/06/26/book-review-the-shipping-man/
The company has minimal ongoing capex. Lessees bear almost all the costs. Danaos would only incur capex if it makes an active decision to modify the ship or buy a new ship. Some costs are capitalized and flown-fhrough the P&L like Dry-docking, but I did not factor those in my D&A (it's not overly material anyway)
Ultimately, the FCF calculation I made is simply to showcase the near-term FCF generation because their fleet is young. If you want to be conservative, over the long-term, FCF will roughly equal NI. That's because the cost of a newship should be seen as ongoing capex as their current ships need to eventually be retired.
As I said, leases cannot be resiliated, even for newbuilds. The only time it has happened in the industry is when the customer goes bankrupt. This is how Danaos received equity stake in Shipliner ZIM.
Why not just pay out all earnings? I wish they did, but they don't, unfortunately. Danaos has decided to approach it in a balanced way; grow the dividend, buyback stock, and invest in the fleet or buy new segments like Drybulk when the market is in the gutters and they think they can generate outsized return by buying ships below well below market value.
I personally think using all your cash to buyback stock in a cyclical industry is not the proper approach. Balanced approached makes sense. Certainly they could be more aggressive, but I've seen many cyclical companies do big buybacks right before an industry implosion and now they are on the verge of bankruptcy ( many retailers like Sleep Number, Big Lots, come to mind)