Financial Literacy

The Global Shipping Container Shortage

The Global Shipping Container Shortage: Riding the Waves to Profits

by Tony D’Altorio, Investment U Research
Wednesday, June 30, 2010

Few have suffered the stormy seas that the container shipping industry has.

Those companies saw a collective 10% slump last year, the worst in the industry’s 54-year history. In the depths of 2009’s downturn, they wondered if they could recoup their losses even in five years.

Fortunately, that dour outlook has dissipated. Some shipping businesses are looking at breaking even in this quarter or the next. And the UBS freight rate index, which tracks spot rates on key trade routes, has risen 60% so far this year.

That’s all occurring without any real rise in U.S. housing starts or the retailers’ inventory-to-sales ratio. Normally, those two factors have to carry any such recovery on their shoulders. But this time, Asia has taken their place.

Following robust export numbers, intra-Asian container trade (including Australia) should grow by 12% this year. That’s more than double the rate between the United States, Asia and Europe.

Many shipping industry insiders even expect some operators’ Asian route 2010 revenues to beat 2008 levels.

A Global Shipping Container Shortage

The explosion in intra-Asian trade has led to a global shipping container shortage within the industry.

Just a few months ago, very few people thought that possible. In fact, many shipping container and leasing companies stopped sourcing and producing containers altogether during the 2008-09 slump. So this rebound has caught the major shipping lines by surprise.

To top off the resulting shortage, many Chinese container factories have gone on strike. And most shipping companies have purposely slowed business down to save fuel and money. Summing it up, Lars Reno Jakobsen, the head of Network and Product for Maersk Line, had this to say: “We already see a tight equipment situation. We expect an even more pronounced and serious shortage of containers in the coming months as we enter peak season.”

The peak season for the container shipping industry runs from June through October. And exporters have already issued warnings and requests, urging customers to quickly return containers. Maersk is even using some of its super-fast ships to rush empty boxes back to Asian ports.

Not too long ago, those same ships remained idle.

Research company Tufton Oceanic believes the industry needs up to 6 million shipping containers to restore it to the conventional 2.2 containers per available slot. To put that into perspective, that’s equivalent to two years’ worth of production.

The Shipping Container Shortage And An Insight Into Textainer

That’s all good news to Textainer Group Holdings (NYSE: TGH), the world’s largest shipping container leasing company. Its owned and managed container fleet is composed of 2.2 million, twenty-foot equivalent units (TEU), with a current replacement cost of over $5 billion.

Textainer also sells the largest amount of used containers in the world. It purchases older models from customers and sells them along with those its own fleet disposes of.

The company has over 400 leasing customers altogether. That includes the world’s major shipping lines and over 1,000 sales clients. And it has offices in more than 130 ports around the world.

Textainer handles all types of shipping containers:

  • Dry freight,
  • Refrigerated
  • And special purpose, 20-foot and 40-foot.

So it has its hands in everything from toys and computers to heavy machinery.

For the first quarter, revenue came in up 16% year-on-year to $69 million. Earnings looked good too, at 52 cents a share and 24% above consensus earnings estimates. CEO John Maccarone notes that 70% of his company’s fleet is committed to long-term leases. This allowed it to enjoy an incredible 90% utilization rate during that same period.

And its future looks even better…

With strong demand driving Textainer’s results, it has moved to increase its fleet by ordering 70,000 new containers. Remarkably, 94% – or 66,000 – of those are already locked into long-term contracts.

Add to that a solid balance sheet of $56 million in cash and equivalents, and a debt-to-equity ratio of 1.1 to 1… well below the industry average of 1.4 to 1. And Textainer has paid a quarterly dividend ever since its initial IPO in 2007. It even recently raised its quarterly payout to 24 cents a share or 96 cents a year.

Trading at a conservative forward P/E ratio of 12, Textainer is a great, reasonably valued way to play the growth in Asian and global trade.

Good investing,

Tony Daltorio

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