Did This Container Ship Operator Mess Up In A Big Way?

For the longest time, Monaco-based Costamare (CMRE 1.25%) was known as a containership operator — a good one, to be sure. For as far back as S&P Global Market Intelligence keeps records, the company has never reported a money-losing year — but still, a containership operator plain and simple.

In June 2021, Costamare began dipping its toe in the dry bulk shipping sector, announcing the acquisition of 16 used dry bulk ships with an average age of about 10 years. In subsequent quarters, the company has grown this part of its fleet, and late last year, it announced that it had made a “strategic decision” to “enter the dry bulk sector at an opportune time in the cycle.” Henceforth, Costamare will ship containerized cargo on the one hand, while its other hand busies itself transporting piles of iron pellets, coal, grain, and similar dry bulk cargoes.

Is this a good idea or a bad idea? On Monday, investors got a clue when Costamare released its Q1 2023 earnings report, containing data on the “first full operational quarter of Costamare Bulkers, Inc. (CBI)” (as well as on its containership operations).

Here’s how it went.

Costamare by the numbers

Sales declined 7% year over year to $248.8 million, but net profits climbed 25% to $1.16 per share. Management did note, however, that its adjusted net income fell 55% to $0.38 per share.

How does that make sense? The major difference between the two numbers owes to some $89.1 million in profits Costamare booked from the resale of ships culled from its fleet, which was much greater this year than last. Adjusted to back out those gains, the company was a whole lot less profitable in its core shipping businesses.

What may be of more interest to investors, though, is how these two different businesses — containerships and dry bulk ships — performed.

A tale of two shipping divisions

Breaking down its revenue by segment, Costamare explained that its containership fleet provided $195.7 million of its revenue in the quarter, whereas its dry bulk fleet and CBI combined generated only $53.1 million.

This is curious because the company currently lists some 71 containerships in its fleet, and only 51 dry bulk ships.

Conclusion: With only 58% of the fleet, Costamare’s containership segment generated 79% of the company’s revenue. Conversely, the 42% of the fleet that comprises dry bulk ships contributed only 21% of its sales. Or put another way…Costamare’s old containerships biz performed a whole lot better than its new dry bulk venture.

Commenting on the results, CEO Gregory Zikos noted that “in the containership market, charter rates are on a rising trend with high demand across the board.” For long-term investors in Costamare, this news probably comes as a relief after watching container shipping prices go basically nowhere but down over the last 15 months. (From a high near $9,800 per container in February 2022, the Freightos Baltic Index shows shipping prices have fallen 85% to just over $1,400 today.)

Dry bulk rates (according to Baltic Exchange Dry Index data) are similarly turning around, and haven’t fallen as steeply as container rates — they’re down 25% over the last 15 months. Zikos didn’t say as much on the subject of dry bulk rates. He did note, however, that in contrast to containerships, where the company has locked nearly 100% of its fleet into contracts through the end of this year (and indeed, for much of the next four years), Costamare is currently hiring out its dry bulk ships “on the spot market.”

This seems prudent given that dry bulk rates have roughly tripled over the last three months. It also helps to explain why dry bulk results last quarter appear so weak in comparison to the containership division.

What it means to investors

So did Costamare make a huge mistake in buying dry bulk ships to add to its historical containership fleet? Its first-quarter results seem to suggest this, but as we see spot prices on the dry bulk market skyrocket, Q2 could be a different story.

Either way — whether management did or did not make a mistake in diversifying into dry bulk — at a recent valuation of just 1.8 times trailing earnings (no, that’s not a typo), there doesn’t appear to be a whole lot of risk in Costamare stock today. And this could prove especially true if shipping prices in both containers and dry bulk may have finally hit bottom and profits are going to rebound.

Factor in a generous 5.5% dividend yield to boost your returns, and Costamare stock looks like a good bet to me.

That may no longer be the case.