2023-11-24 00:19:01 ET
Summary
- Navios Maritime Partners has faced challenges in the past due to volatile market conditions, high leverage, and the impact of COVID-19 pandemic.
- The company has implemented measures to secure its future, including optimizing its fleet, entering into long-term charters, and reducing its debt.
- While these measures are promising, their impact will be long-term, and investors should exercise patience before investing in the company. As a result, my rating for the stock is hold.
Investment Thesis
Navios Maritime Partners L.P. ( NMM ) is a shipping company that operates in the maritime industry’s dry bulk and container segments. The stock price of NMM has been volatile in the past year, ranging from a low of $19.23 to a high of $28.80. This volatility has been a result of several reasons, such as the impact of COVID-19 pandemic, which disrupted global trade and reduced the demand for dry bulk and container shipping, the rationalization of the company’s portfolio, which involved selling older vessels and acquiring newer and more efficient vessels, and improved the average age and operating costs of the fleet, among other reasons.
On evaluating the company, the management appears to have learned from its previous challenges and has developed turn-around and transformative strategies that I am confident will address the previous challenge and lead to a brighter future, especially given the market’s projected positive outlook . Although I am optimistic about this stock in the long run, I would recommend patience before investing for the current headwinds to subsidize and for the technical indicators to improve.
What Weighed NMM Down
Navios has faced several challenges in the past that have affected its performance and share prices. This can best be explained by its volatile share prices. Some of these challenges that weighed down NMM and impacted its performance are discussed below:
To begin with is the volatility of the global shipping market, which depends on factors such as supply and demand, fuel prices, trade policies, weather conditions, and geopolitical events. NMM has experienced periods of low freight rates and high operating costs, which have reduced its profitability and cash flow. In the volatile market, NMM’s revenues and profitability have been responsive to the volatility. Here are two examples of how the volatile markets affected NMM. For instance, in 2018, when the shipping market was weak , as the demand for dry bulk and container shipping was low, and the supply of vessels was high. This resulted in low charter rates, revenues for NMM, and high operating costs and impairments. Specifically, the company recorded revenue of $231.4 million and a net loss of $13.1 million. Other operating expenses increased from $3.8 million in 2017 to $5.3 million in 2018.
Consider 2022, another example when the shipping market was strong as the demand for commodities and containers remained high, and the supply of vessels remained low due to the ongoing challenges and uncertainties in the shipping industry. This resulted in record-high charter rates, revenues for NMM, and high profits. The company recorded a total revenue of $1.21 billion, an increase of about 69.7% from 2021, and a net income of $579.2 million, an increase of about 12.2% from 2021. Looking at these two examples, it is evident that NMM has been directly impacted by the volatility in the market in the past, which I believe explains its volatile share prices.
Another factor that weighed down the company in the past is the high leverage and debt burden of Navios, which has limited its financial flexibility and increased its interest expenses. The company has had to refinance its debt and raise capital through equity offerings , diluting its shareholders and lowering its share prices. Its total debt has increased from $503 million in 2019 to $2.2 billion in 2022, and its interest expenses increased from $39.2 million to $83.1 million in the same time frame. This was against a cash flow from operations of $506.3 million in 2022, representing debt coverage of about 23%, which I believe isn’t impressive in the current inflationary environment. Further, increasing interest expenses weigh down the company’s cash flow and profitability, which isn’t desirable.
Lastly is the impact of the COVID-19 pandemic, which has disrupted global trade and transportation activities and caused operational difficulties and health risks for Navios and its crew. NMM has had to implement safety measures and contingency plans, which increased its costs and reduced its efficiency.
These are some of the major challenges that I believe have hampered NMM in the past. These challenges, in my opinion, have been the primary cause of the volatility in the company’s share prices. While I recognize the headwinds, management appears to be securing its future by devising measures to mitigate these headwinds. In the following section, I will discuss the measures put in place to counteract these headwinds and possibly drive a secure future.
Securing The Future?
Having experienced the headwinds discussed above, NMM has come up with measures that I believe are geared toward a secure future. Here are some of the actions:
First is implementing safety and contingency plans to cope with the COVID-19 pandemic and ensure the health and well-being of its crew and staff. Since the implementation of these measures came with increased costs , which was a major headwind, NMM has resulted in optimizing its fleet by selling old vessels and acquiring new vessels that are designed with the latest technology to improve efficiency and performance. The optimization of the fleet is expected to enhance the competitiveness and profitability of NMM in the shipping industry. For example, this year, NMM announced the sale of 11 vessels . The sale would reduce the fleet’s average age and operating costs. This will improve the company’s bottom lines because its total operating expenses will decrease.
In the same year, NMM announced the acquisition of four 115,000 dwt newbuilding scrubber-fitted Aframax/LR2 tankers. The vessels have been designed with the latest technology, optimizing efficiency, and will carry both crude and clean products. The vessels are expected to be delivered into Navios Partners’ fleet in 2026. The vessels are designed with the latest technology to optimize efficiency and can carry both crude oil and clean products.
Although the estimated costs that the optimization will save the company are not publicly available, I can just mention some of the benefits that I believe will arise from this acquisition, which would translate to low costs and efficiency. For instance, I expect the optimization to reduce the operating expenses and maintenance costs, which are associated with the vessels’ age and condition and affect the vessels’ efficiency and safety.
Another measure that the company has put in place to counter the challenges is entering into long-term chartered agreements. NMM announced that two of the four VLCC vessels have been chartered for five years at a net rate of $25,576 per day with an investment-grade counterparty. The charterer has an option for five one-year options at rates increasing by $1,234 per day each year. In my view, the charter contracts will provide stable and predictable cash flows and reduce the exposure to market fluctuations, something I believe will mitigate the volatility experienced by the company due to a volatile market.
Lastly, the company has a high debt burden, limiting its financial flexibility and increasing interest expenses. However, the company seems to be paying off the debt in 2023. A look at the balance sheet shows that the company has reduced its total debt from $2.25 billion in 2022 to the current balance of $1.93 billion, which shows its commitment to deleverage. Further, in 2023, NMM has refinanced some of its obligations, extending its maturities, which gave them temporary but much-needed financial flexibility. Although the debt burden remains a challenge, management appears to be committed to deleveraging and implementing measures to extend maturities so that current economic headwinds are mitigated.
In summary, NMM is securing its future by implementing optimization measures to lower costs and increase profitability. The company is also mitigating market volatility through secured long-term charters, which will ensure a consistent cash flow and act as a buffer against market-related trends. Furthermore, the company appears to be deleveraging, as evidenced by the lower debt in 2023, which, if sustained, would provide the company with much-needed financial flexibility. However, although these measures are promising, their fruition is long-term in scope, and therefore, investors need patience as we await for them to take course.
Technical Analysis
This section will cover the technical analysis of NMM based on various indicators. To begin with, the price of NMM has been in a downtrend since February 2023, as it has been making lower highs and lower lows and trading below the 50-day moving average, indicating a bearish trend. The stock has been fluctuating within a descending channel, a bearish pattern showing a series of lower highs and lower lows within two parallel downward-sloping trend lines. The price has been bouncing between the upper and lower boundaries of the channel, which act as the resistance and support levels, respectively. It tested the channel’s upper boundary but failed to break above it and resumed its downward movement. A break below the lower boundary ($20.39) would mark a stronger bearish trend, which would mark my sell decision, while a break above the upper boundary ($24.12) would mark a bullish trajectory leading to my buy decisions.
Further, the price of NMM is trading within the middle of the Bollinger Bands, which measures the volatility and the deviation from the average price. The band converges, indicating a possible breakout and an onset of a bullish trajectory. If the price breaks above the upper band, it would mark a bullish trend.
The RSI has recently risen above the 50 level, the neutral threshold, indicating a possible bounce or reversal. However, the RSI is still below the 70 level, which indicates a weak signal.
My Final Thoughts
NMM is striving to mitigate some of its long-term challenges with what appears to be long-term solutions. With its current optimization, I believe the company can benefit from the projected positive outlook of the market. However, while I am optimistic about the future, the status quo remains because most of these measures will take effect in the years to come. This explains why the CEO was cautious about the looming tough economic times that could weigh down the company.
Angeliki Frangou ,” The U.S. has high government debt levels and the highest pastime fiscal deficit. The Fed is engaged in the computative tightening, and there is a risk of interest rates rising further from their current relatively elevated levels. China, the world's largest consumer of commodities, is not firing on all cylinders. These factors, along the wars in Ukraine and Israel, are contributing to making this one of the most dangerous times in memory.”
With this background, it is clear that the company is still exposed to the risk of a volatile market. Furthermore, despite its efforts to deleverage, NMM is still saddled with a large debt burden, which poses a financial risk to them. With this in mind and guided by the technical analysis, I would recommend patience as we wait for this company’s long-term measures to take effect and bear fruit.
For further details see:
Navios Maritime Partners: Wait Until Measures Yield Results