2023-06-06 22:46:48 ET
Summary
- Danaos, a Greece-based shipping company, has effectively paid off its debt with the boom in shipping rates since the COVID pandemic began.
- The company's low debt levels and high profit margins make it a strong contender in the containership industry.
- Danaos shares are currently trading at a significant discount to book value, offering the potential for powerful investor gains into 2024.
- A Golden Cross formation just took place on the technical trading chart yesterday.
Danaos ( DAC ) is sitting at an extremely low valuation, that literally makes no mathematical sense to me. If you are searching for a hard asset, deep value choice, holding almost no debt, this name is worth your research time. The company is based in Greece. It runs a fleet of 68 containerships aggregating 421,293 twenty-foot equivalent units in capacity.
What's amazing is the boom in shipping rates since the COVID pandemic started has allowed the company effectively pay off all of its debt (after subtracting cash on the balance sheet). A company that borrowed greater than $3 billion in debt during 2013, backed by its shipping vessels, is now an investment vehicle where you own the fleet outright. It's really kind of unheard of in the capital-intensive transportation industry. Other maritime operators have kept debt levels high through the addition of new vessels and capacity. But not Danaos. Management has decided to take advantage of the overseas shipping boom in an ultra-conservative way, using the pandemic windfall to create a fortress balance sheet.
Why should this matter to shareowners? Because the company is now very insulated from a recession in this cyclical industry. Even a severe recession may not be able to pull earnings into a negative position, like past economic contractions. So, Danaos will either earn a little money (in a rotten economy) to a whole bunch of income (when times are good like today).
Hold on to your knickers, but I honestly believe - with its super-safe drawdown of total liabilities - DAC stock should trade around its book value, if not higher like it did nine years ago in 2014. The book value number is $132 a share today, likely rising above $150 by early 2024. With shares trading hands at $61 this morning, a huge discount to reality may now be available for smart investors.
Debt Repayment
It's really incredible how the aggressive and successful debt paydown plan has played out. Deleveraging its total debt number of $3.3 billion in 2013, today's $423 million in IOUs is almost zeroed out with $360 million in cash in the bank. Net financial debt now sits at a minor $64 million!
This decision has cratered the enterprise value of the company down to a number close to its equity market capitalization, which could start to reduce EV vs. the market cap total in coming quarters (as cash and earnings keep rolling in).
Valuation Story
When you review the basic fundamental ratios of underlying worth, Danaos does look like a bargain, but not by a greater degree than other "value" picks on Wall Street today.
For example, reviewing price to trailing earnings, sales, cash flow, and book value multiples, the company is now positioned at a rough -15% discount to 10-year averages.
However, when we consider the typically high debt total for the business has now been effectively eliminated, a whole new picture of undervaluation appears. On the net enterprise valuation (which adds debt and subtracts cash), Danaos is currently trading at a RECORD LOW vs. cash EBITDA and sales, especially on a forward projected basis for 2023 results.
The biggest benefit for investors owning the company is the collapse in debt has translated into record high profit margins for the enterprise during the pandemic boom in shipping. In terms of efficiency, owning/buying an investment with industry-leading gross, operating, and final net profit margins is a winning proposition historically. With one of the highest operating margins combining with the positive effects of no significant debt, I fully expect Danaos to deliver one of the strongest net profit margins in the containership industry for years to come.
In the context of sky-high margins and little debt to hurt financial flexibility, sporting the lowest enterprise value to forward EBITDA ratio in the maritime industry is a complete disconnect. You can review the Danaos -50% discount to the shipping group's median average of EV to forward estimated EBITDA below.
Price to Book Value Convergence
And, if you have zero net debt and the highest margins in your industry, similar setups on Wall Street have almost always led the share price to trade "above" book value readings, especially on net hard assets in an inflationary environment.
My forecast is Danaos may again trade above book value in 2024, which is $132 per share today, likely rising beyond $150 over 9-12 months. For sure, the largest "discount" to book value right now in history (of -$1.6 billion) is very difficult to understand, even given a recession (which has not fully materialized yet). Then contemplate during the 2008 shipping boom, Danaos traded well above book value while holding considerable debt levels.
Technical Chart
I would rate the whole technical momentum background as constructive, although not a standout selection. The main positives are the low-volume basing pattern since October, alongside price starting to break out of this base in May-June.
The clearest bullish argument on the chart revolves around the "Golden Cross" achieved yesterday (June 5th, 2023). When the 50-day moving average crosses the 200-day moving average, and the share quote is above both lines, technicians and traders tend to get more excited about imminent gains. I have marked with a gold arrow this encouraging development below.
Final Thoughts
As long as earnings remain extraordinarily strong, it's hard to predict a major drop in Danaos share pricing. Below is a table of Wall Street analyst consensus forecasts for EPS and sales during 2023-25. Again, it's all but impossible to find any company with little debt trading at 2x or 3x forward EPS results. The overall U.S. equity market average is priced closer to 20x immediate-future, after-tax income generation projections.
In fact, robust levels of cash flow and earnings could encourage direct share repurchases by management to pull price closer to book value (perhaps after all debt is repaid soon). The good news for remaining shareholders is buying back ownership interests at HALF of book value is tremendously accretive. Believe it or not, a major share buyback program and high levels of income could shoot book value per share above $200 in a couple of years.
If a no-debt balance sheet encourages a rerating of the Danaos valuation back to book value, buying at $60 now is a no-brainer. On the upside, a triple in price to $180-200 could be the "easiest" money you will have a chance to pocket over the next 12-18 months.
What's the downside? Perhaps the biggest long-term risk to huge investment gains in 2023-24 is a severe and prolonged recession knocking sales and earnings lower than expected presently. While the odds of such a scenario are decent (maybe 25%), Danaos should survive far better than peers and competitors, with its zero net debt foundation.
Pulling all the risk/reward analysis ideas together, I am pegging worst-case scenario downside to $40 vs. best-case upside to $200 by the end of 2024. Depending on dividends (Danaos likes to pay them), total return loss potential of -30% is balanced against possible gains of better than +200% over the next 18-24 months. I rate shares a Strong Buy in the low-$60s.
For further details see:
Danaos: Undervaluation To The Extreme