CMRE - Costamare Inc.: All On Board

Summary

• Costamare generated record net income in the MRQ, largely because of skyrocketing shipping rates.
• Majority of its revenue comes through containerships, but it is now venturing further into the dry bulk market.
• It has been paying a consistent dividend for a decade with a 4-year average yield of over 6%, and it recently repurchased over $52 million worth of its shares.
• I rate Costamare stock as a buy for long-term investors because, despite a short-term decline in the shipping rates, the long-term industry outlook remains positive.

Investment Thesis

Costamare Inc. ( CMRE ) has lost about 14% since we last covered it, compared to the market's loss of about 15.5%. Even though the stock showed a consistent rise through Q1, it has declined ever since and has fallen by 36% from April to September 1st, largely due to the high volatility in the post-pandemic market.

The company has a fleet of 76 container ship vessels (63% of the total fleet) and 45 dry bulk vessels. Still, the Gross Net Income in the MRQ was $64.5 million, of which a massive $64 million is attributed to the container ship vessels; these numbers will continue to be as strong since the company announced that the container ship fleet is fully employed till the end of 2022, 95% for 2023, while 84% of the days of 2024 are booked.

I am bullish on Costamare stock because I expect the macroeconomic headwinds to subside in the upcoming year and the market to stabilize, pushing the company upward through stable and sustainable freight and growth rates, directly affecting the total shareholder returns through dividends and capital appreciation.

Effect Of Freight Rates

According to recent statistics , about 29% of the increase in freight rates was due to the pandemic and other pandemic-related issues. In comparison, 24% was attributed to container shortages and 12% to carriers' capacity management.

Even though the global freight rates have shown a steady decline in recent weeks, they will not go down to the pre-pandemic level but develop a new normal level. In the future, we expect this declining trend to be halted, and a rise may be seen due to an early peak season restart in the run-up to the holiday season.

Venturing Further Into Dry Bulk

Costamare has been actively trying to expand its dry bulk side of the business and showed its intentions by acquiring dry bulk vessels in the previous year. In their most recent conference call, the company hinted at more investment into the dry bulk sector as they feel comfortable with its long-term outlook.

In the future, the global dry bulk shipping market is projected to reach $5.06 billion by 2026 from $4.2 billion in 2019, as reported in the Transportation and Logistics category of valuates reports . The company has entered into 27 chartered agreements for dry bulk since the Q1 2022 earnings release, clearly showing its intentions.

Even though the dry bulk business has seen a steady decline recently, there is enthusiasm in the market regarding the future since China will be ramping up its spending in this sector after coming out of its pandemic-related caution. We believe that the market will soon come out of its systemic downturn and rebound, which keeps us optimistic regarding the medium and long-term outlook because the demand for commodities in China is not slowing down any time soon despite the recent stunted economic growth.

The post-pandemic clouds of uncertainty are slowly fading, and the gradual normalization of trade demand and supply dynamics that have historically shaped dry bulk shipping is being restored.

Profitability

The company reported a record net income of $114.1 million ($0.92 per share) in Q2 2022 compared to $82.8 million ($0.67 per share) in Q2 of 2021, largely due to a rise in demand and backlog because of the post-pandemic effects.

The company showed a remarkable revenue increase of 135% in the previous 3 years. In comparison, the net income saw an incremental increase of 239%, which shows that the company leveraged its position in the market by taking advantage of the rising prices while keeping operational costs low.

This operating leverage is a direct consequence of effective management, as is evident from the company's augmented management effectiveness ratios, which are significantly higher than the sector median. Additionally, the company's net income per employee is almost 9 times higher than the sector median and over 2.1x times higher than its 5-year average. All these metrics directly speak of the management's competency to generate shareholder returns.

Financial Position

Liquidity also saw a substantial rise from $564 million in Q2 2021 to $854 million in Q2 2022, a rise of 51%, mostly due to securing a $500 million syndicated loan facility. The company also refinanced the existing indebtedness of 17 vessels, resulting in a significant reduction in funding costs.

The company balance sheet shows a consistent sequential increase in book value per share since Q3 2020, which can be attributed to its efficient capital management. This is further bolstered by the Dec 2021 announcement of the $150 million share buyback authorization.

A major portion of the performance of a company in the maritime industry is dictated by global demand; this, in turn, puts a lot of pressure on the companies, which is eased to some extent through long-term contracts but other costs, i.e., fees, fuel and can be variable and may change quite frequently.

Accordingly, the current supply side risks posed by the Russia-Ukraine conflict and the demand side risks posed by the stunted Chinese demand have suppressed the global dry bulk shipping volumes.

Similarly, the high inflation and the technical recession are facilitating this strenuous macroeconomic environment and geopolitical instability to shrink the margins of dry bulk shippers. Once these temporary headwinds subside, the industry will likely exhibit a YoY growth spurt, ushering the sector into the new normalcy.

Valuation

The company reported a TTM dividend yield of 4.15%, which is 142% higher than the sector median over the same period. Even though the average dividend yield is good considering the turbulent market, it has seen its fair share of ebb and flows over the past year because of the high volatility in the share price, as evident from its 60-month beta of 1.4x.

It currently pays out a dividend of $0.46 per share annually, with the stock priced at around $11.09 a share, which appears to be an undervaluation relative to its fair value.

Costamare has consistently raised quarterly dividends over the past decade, promptly rewarding shareholders. The company also authorized a $150 million share repurchase program, of which shares worth $52.4 million have been bought back in the MRQ, directly affecting the total investor returns.

Based on revenue, the company trades at a modest P/S ratio of 1.3x, equivalent to the sector median is appears significantly undervalued based on its P/E and P/B multiples.

Its TTM P/E and P/B multiples of 2.80x and 0.72x are significantly lower than the sector median of 18.26x and 2.22x, showing an undervaluation of 70% and 85%, respectively.

Conclusion

Costamare's current stock price seems undervalued as the company has shown excellent management capabilities, evident by keeping up the dividend yield despite the staggering inflation. The company is in the perfect position to remain dominant in the container ship industry while also pushing for future growth in the dry bulk side of the business.

The stock price has shown volatility recently, but that is also factual for the sector as a whole; CMRE has shown itself to be very resilient by consistently delivering high dividends.

Finally, Costamare is a stock you can hold for reliable dividend yields while looking forward to the company's future growth and capital appreciation in the long-term horizon.

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