CMRE - Costamare: Diversified And Hinting Towards Strong Growth

Summary

• Costamare is diversified across the dry bulk and container shipping segments. Recently, they started chartering in vessels, which hints to some strong rate of growth coming.
• Despite the increased age of its fleet, CMRE has done a great job securing long-term time charters for its container vessels, thus, offsetting the weak dry bulk spot market.
• While the dividend of the common shares is not outstanding, there is a strong alignment of interests between the sponsor family and shareholders and an ongoing share repurchase plan.
• To the dark side of things, the company's rapid growth has caused it to be highly leveraged, although, still at a manageable level.
• In my opinion, investors could consider a long position in Costamare, given the prospects of the dry bulk market and the current position of the company in the container market.

When I wrote my last article in Costamare ( CMRE ), " Costamare: There Will Be Pain, But Much More Gain ", I concluded that, in the short time, there may be some pain, but long-term investors should taste the fruits of their patience. Today, I'm revisiting my thesis, starting from the company's recently posted Q4 2022 earnings . In the following paragraphs, I will make a quick review of Costamare's earnings, outline the pros and cons and, finally, reach to conclusions as to whether the time of pain has passed, and the time of gain is coming.

Q4 2022 Earnings Snapshot

For the fourth quarter of 2022, Costamare reported total revenues of $265 million and earnings per share of $0.61. While the former outperformed estimates by $13 million, the latter fell $0.04 short. Spectacularly, the company finished the year with $973 million of total liquidity, almost $950 million of which, are cash and cash equivalents, as well as short-term investments. Things get even more spectacular if we take into consideration the company's market cap of $1.2 billion, and its total debt of $2.6 billion.

Company Identity

To the readers that are unfamiliar with the company, let me point out that Costamare was a container shipper which decided to differentiate its services by expanding into the dry bulk sector. Therefore, the company purchased a total of 45 dry bulk vessels, across all vessel types, except for Capesizes. The purchase of these vessels was opportunistic, with the intention to exploit the booming dry bulk market at the time. The total number of dry bulk vessels owned by the company is now 68, with total available tonnage reaching 2.4 million DWT. All of Costamare's tonnage is being deployed in the spot market. The containership segment is comprised of 72 vessels with a total capacity of 531k TEUs and an average age of 14 years.

In addition, the company set up a new venture, under the name Costamare Bulkers Inc. ((CBI)) in an attempt to enhance operations and extract more value from forward freight agreements, hedging, and vessel chartering. The new venture, which is fully consolidated under the parent company, has already chartered in 23 vessels, of the Capesize and Kamsarmax categories.

What I Like

• Fleet diversification: What is not to like here? An investment in Costamare gives the investor the opportunity to enjoy exposure in both the dry bulk and the containership markets. Apart from that, the company's decision to create the CBI platform diversifies its investment product more, by hedging rates effectively, while opportunistically exploiting any charter-in opportunities that may arise. The new platform is funded with $100 million, with prospects of increasing its funds to $200 million. The timing of the new venture implementation also leads me to believe that the company is anticipating a significant betterment of the dry bulk market. Let me remind the reader that, as I wrote in my last article, " Star Bulk Carriers: A Quality Holding But A Further Dividend Reduction Should Be Expected ", currently the BDI is trading at early COVID-19 pandemic levels. It could be true that Costamare's management is looking to secure some cheap charters now, in order to bear the fruits when the market recovers. In the recent earnings call , it was stated that most of the time charter contracts will have a 3- to 4-year duration, and they will be chartered using a combination of fixed and index-linked rates.
• Long-term containership chartering : The company did a nice job securing high-time charter rates for its containerships and now is set to benefit from not having to adjust to the new, significantly lower freight rates. It is the exact opposite reason for which container liners like ZIM and Maersk have been underperforming in the last months. For this year and 2024, Costamare has fixed 96% and 85% of its containership fleet, respectively.
• Strong alignment of interests : The sponsor family has been reinvesting the company's dividends for many years, which is translated as a token of trust to the company. Today, almost 60% of the company is owned by the Konstantakopoulos family, while another 23% is owned by institutions.
• Active share repurchase program : The company has $90 million remaining in its common share repurchase program and $150 million for its preferred shares.

What I Don't Like

• Fleet age : The average age of the newly added dry bulk vessels, as well as the container vessels, is 12 and 14 years, respectively. Assuming a 25-year economic life for a vessel, we can realize that the company's vessels are beginning to age beyond the 12.5-year mark.
• Leverage : Rapid expansion comes at a cost of high leverage, especially in times of expensive liquidity. Right now, the company has a total debt of $2.58 billion, most of which is secured against its assets. The company's market cap is just $1.2 billion. However, in the fourth quarter of 2022, the company made significant steps towards the reduction of their interest expense and the extension of their loans. Consequently, today, Costamare's interest expense is covered by its EBIT by 3.1 times. For perspective, Star Bulk Carriers ( SBLK ) has an EBIT to Interest Expense multiple of 5.85x, while this figure, in Safe Bulkers ( SB ), stands at 6.2x. While debt seems manageable, the company's priority in the next shipping cycle should be to drastically reduce it. In any case, there are no debt maturities, until 2026.
• Absence of a straightforward dividend program : While I don't consider myself to be a pure dividend investor, I would like to see some clearly defined dividend policy on the company's common shares. Of course, there's always the option of the preferred shares, but, again, these are mostly appealing to income investors.

Bottom Line

Costamare is definitely worthy of an investment right now. I believe that, despite the recent plummeting of the BDI, freight rates are expected to improve rapidly in the next few quarters, as the first quarter of each year is usually the weakest. Moreover, the company has also exposure in the much worse container market, but with the unequivocal advantage of secured, long-term time charters. The newly created CBI will boost value and, in my opinion, is hinting towards a strong recovery. The only caveat is the very high leverage, although it is completely manageable.

Technically, the share price has left the local bottom of $8.70 and is following a clear uptrend, confirmed by increasing volume. However, the $10.77 Fib level will be hard to break, as it is fortified by the 200-day moving average. In all, after a period of accumulation in the present share price levels, I expect a breakout towards the next resistance of $12.20.

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