Costamare Stock – Benefitting from The Commodity Environment (NYSECMRE)

Costamare (CMRE), is a company that we first covered back in the days when markets were in their final days. A combination of factors and a recovery in markets has resulted in a return of over 200%.

Although the current results reflect the increasing cycle in which S/D dynamics of the containership market and logistics market are being more accurately reflected, there are still reasons to believe that the situation is likely to remain strong. CMRE is a good investment despite the fact that the valuation does not reflect a compelling situation. There are potential catalysts that could counterbalance other risks and CMRE remains a strong hold. CMRE is not a high priority investment play, but it is passable due to the decrease in dividend yields.

First, a Q3 look

Shipping trends have been very attractive. There has been a steady turnaround in scrapping rates that reached highs several years ago, particularly in connection with IMO regulation change changes, which created a situation for severely constrained supplies.

The constrained supply of shipping and the IMO changes have already had a positive effect on rates. However, COVID-19 has only had a limited impact on commodities prices. These were further enhanced.In dry bulk shipping, infrastructure improvements and generally higher demand for goods over service has led to the current situation where commodities in huge flow require an exceptional number of ships, which has pushed charter rates to the levels pictured above. Port inefficiencies, general logistics constraints and increased demand for goods and services have all been boons to companies. This has resulted in triple-digit stock prices and EPS growths of 517%. Although fleets are being updated with more modern and compliant vessels, there will be a delay before the fleets actually grow to the point that it affects supply dynamics.

Catalysts

On the demand side, although we have seen huge increases in the prices many commodities, certain key commodities have experienced significant pullbacks in their price and volume. These are the issues that could pose risks to production, trade and shipping. China’s reduction in steel mill activity has had a negative impact on iron ore. This has caused a drop in iron ore flow to China. Although there are many other products that could still be transported, the current charter rate rally would be extended if iron ore recovery is realized. We believe that steel mill price caps will be removed once the spotlight has left China. Additionally, we believe that iron ore demand due to infrastructure will continue to drive up prices, perhaps more moderately in the future.

Conclusions and Risks

Apart from the usual cycle risks, to whom CMRE is particularly vulnerable due to operating leverage, sanctions that could be imposed on Russia in the event of an invasion by Ukraine pose a risk for trade and shipping companies. As we mentioned in our original thesis for 2020, the current situation in dry bulk shipping is mostly due to supply dynamics. The exceptional supply pressure resulting from years of sector unprofitability has caused the scrapping situation today and the consequent shortage in ships. This is likely to be more severe than normal due to the long lead times caused by inflationary pressure and scarcity in many commodities. It takes approximately two years for productive capacity growth to occur. We can expect exceptional quarters before cycle risks start to rear their heads, as investments have only recently picked up. This is because of the COVID-19-induced commodity-intensive economy. Demand factors may slow down this cycle turnaround. The prospects for CMRE in both the near and mid-term remain very good. However, current prices of 6.3 P/E are beginning to reflect a larger multiple. There is still potential upside with a 6.3P/E implying substantial earnings return and two years guarantee in terms of the payback of earnings on price, so we start looking elsewhere in markets where cycle and operating leverage risk don’t interact as viciously for the next big opportunity.

If you found our perspective on this company interesting, you might want to try our service. The Value Lab. We are focused on long-only value strategies. We try to find international mispriced equity and target a Portfolio yield of approximately 4%. We have done very well for ourselves over 5 years, but it was difficult to get our hands dirty in international market. Our team of experienced analysts can help you talk to value-investors who are serious about protecting their wealth. Try our free trial to see if it is right for you.