The Shipbuilding Debate – Is 30% Output Cut Enough?

Shipbuilding is an extraordinary business. Over a century the epicentre has moved from the UK, which once built 60% of the world’s ships, to Europe, Japan, South Korea and now China. Incumbent yards don’t welcome newcomers who have to fight for market share, usually by offering rock bottom prices. Good for shipowners, but the battle often brings shipyard capacity problems in its wake.

Adjusting

Today’s newcomer, China, built market share much faster than its predecessors. In 2000 China only produced 1.3m CGT (a capacity measure, see graph) of new ships, but by 2010 production had surged to 19.4m CGT, exceeding Korea’s 16.0m CGT. To put this in perspective, Korea launched into shipbuilding in the early 1970s, but took 30 years to overtake Japan in 2003. It helped China that yards were quick to embrace new methods, but the real difference was the market. Korea’s launch ran through the 1980s shipbuilding depression, whereas China launched into a super-boom, with owners queuing up for contracts at fancy prices.

Back to Reality

That’s history and today’s big question is “How much of the 53m CGT peak production capacity does the industry need?”. Shipyards have already cut back from their 2010 peak output by 30% to 37m CGT. This involved reducing the active yards worldwide from around 1,200 to 700 and slowing throughput, so the capacity has probably fallen by about 20%.

It Takes Two to

But the real “driver” of shipyard capacity going forward is the ship investment community. In the shortterm they seem very responsive to earnings. In 2010, when bulker earnings picked up, total orders were placed for 46.9m CGT, enough to fill peak capacity. Then as the market wound down in 2011-12 orders halved to 25m CGT. But when bulker earnings improved again in 2013, total orders doubled to 50m CGT. In 2010-13 orders averaged out at 40m CGT pa, 75% of the peak output.

Positive Signals, Negative Drag

Will today’s reduced capacity be needed going forwards? The usual methodology is to estimate trade growth, calculate the ships needed to carry it, and add demolition. Last year trade grew 350mt, creating demand for about 60m dwt of ships. Meanwhile demolition was 45m dwt, so that’s 105m dwt “demand”. Since 2010 orders have averaged 113m dwt pa, pretty close to the requirement.

Limbo Dancing

So, taking one year with another, ordering trends for new ships are not far out of line with demand. But this leaves the issue of clearing the existing surplus capacity, which could be as much as 25% of the fleet. Until this happens, the shipping markets will be caught in limbo and vulnerable to the next “wobble” in the world economy. Not a life-threatening scenario, but not much fun either.

Tango

 

to the Cycles

 

Clarksons Research

SIW1111Shipbuilding is an extraordinary business. Over a century the epicentre has moved from the UK, which once built 60% of the world’s ships, to Europe, Japan, South Korea and now China. Incumbent yards don’t welcome newcomers who have to fight for market share, usually by offering rock bottom prices. Good for shipowners, but the battle often brings shipyard capacity problems in its wake.

Adjusting to the Cycles

Today’s newcomer, China, built market share much faster than its predecessors. In 2000 China only produced 1.3m CGT (a capacity measure, see graph) of new ships, but by 2010 production had surged to 19.4m CGT, exceeding Korea’s 16.0m CGT. To put this in perspective, Korea launched into shipbuilding in the early 1970s, but took 30 years to overtake Japan in 2003. It helped China that yards were quick to embrace new methods, but the real difference was the market. Korea’s launch ran through…

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Globus Medical Buy

GMED : NYSE : US$24.15 
BUY  Target: US$28.00 

COMPANY DESCRIPTION:

Globus is a medical device company focused exclusively on the design, development, and commercialization of products that promote healing in patients with spine disorders.
All amounts in US$ unless otherwise noted

Life Sciences — Biomedical Devices and Services Q4/13 SOLID AS EXPECTED; NEW PRODUCTS AND DISTRIBUTION SET TO DRIVE 2014 AND BEYOND; MAINTAIN BUY AND $28 TARGET
Investment recommendation

We maintain our BUY rating on Globus following a solid Q4/13. Globus’s ability to continue to take share and generate strong operating margins reinforces our thesis that the company offers investors multiple opportunities to create value. Our thesis remains intact and we are buyers of Globus into 2014 as the company looks well positioned for growth via continuous new product flow, significant distribution expansion in 2013, and best in-class financial discipline.
Investment highlights  Q4/13 revenue of $115.2M was solid and in line with the preliminary numbers. Pro forma EPS of $0.25 came in well above our and consensus estimates of $0.22 on higher-than-expected operating leverage.
 Sixteen new product launches in 2013 and significant new rep additions position Globus for accelerating growth into 2014.
 Management reiterated 2014 guidance for revenues in the range of $480M-$486M, and EPS of $0.90-$0.92
Valuation We are maintaining our $28.00 price target based on a 26.8x PE multiple applied to our 2015 EPS estimate of $1.04.

Westport Innovations Inc. Continue To AVOID

WPRT : NASDAQ : US$16.91 WPT : TSX
AVOID

 Target: US$20.00

We have written about the research company that walks like an investment – and said avoid from – was it $40 down- despite the enthusiasm of Motley Fools- better to engage as a client of Jack A. Bass Managed funds is the lesson here.

COMPANY DESCRIPTION: Westport Innovations is a leading developer of technologies that allow engines to operate on gaseous fuels such as natural gas across light, medium, heavy and high horse power market applications.

Investment recommendation

AVOID

Macro challenges keep share volatility high, while the company works to introduce engine platforms and book orders in ‘14. The recent follow-on offering helps alleviate cash issues near-term ($210.6M cash at year-end vs. burn of $26.9M in Q4). While we continue to favor the strategy (and the nat gas macro), risk/reward stays balanced.
Investment highlights

 Few changes this quarter, as Westport finishes a challenging 2013 and looks to transition from R&D phase to increased product adoption in 2014 (with heightened focus on cost optimization and prioritized investments  goal of breakeven adjusted EBITDA for all three units by year-end).
 The outlook for 2014 implies solid growth (~7-13%), despite a ~$25M headwind from discontinuation of first generation HPDI (as focus turns to roll-out of HPDI 2.0 and expectation of improved warranty accruals – work underway with several OEMs currently).
 CWI and Weichai continue to grow nicely, with both JVs reporting record volumes for the year (2014 expected to benefit from ramp of ISX12G and build-out of additional capacity at Weichai). Early opportunities in rail/mining/marine also continue to progress nicely.
 Our 2014 revenue/EPS estimates go to $184M/$(1.80) from $241M/$(1.90); F2015 is introduced at $300M/$(0.90).
Valuation Our $20 price target (from $28) is derived by applying a 4x multiple to our 2015 sales estimate of $300M

Autodesk : Hold

ADSK : NASDAQ : US$54.72 
HOLD  Target: US$52.00 
 COMPANY DESCRIPTION

Autodesk is a global design software company that sells high- function, low-cost 2D and 3D computer-aided design (CAD) applications. The firm also provides visualization and simulation tools, which in conjunction with the company’s design apps, enable customers to experience their ideas early in the design process through the development and analysis of virtual prototypes. All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Applications BUSINESS MODEL CHANGE BEGINS. MAINTAIN HOLD FOR NOW. 
Investment thesis Autodesk generated normalized revenue growth of about 2%, and as reported revenues declined 3%, due in large part to a transition to subscription. If investors react to this transition as they have with Adobe, the stock will work. However, if the underlying fundamentals of the business do not change, Autodesk shares will eventually behave like EDA stocks, which similarly went to subscription, but underlying growth remained sluggish. We lean toward the former scenario, but for the time being, with not quite enough conviction to upgrade the stock. HOLD.
 An OK quarter: a bit of upside versus conservative forecasts. ADSK reported Q4/14 revenue and non-GAAP EPS of $587M and $0.40, which compared to our estimates of $573M and $0.35. Reported revenues were down 3% y-o-y, but when normalized for the model transition, grew 2%. Billings, which will become an increasingly important metric to watch during the transition, grew 3% in the quarter – overall, management was “pleased” with what the firm saw in its first full quarter with subscription licensing options. During Q4, ADSK signed its largest deal ever, worth more than $20M, and noted continued momentum with Suites, which were up 15% y-o-y.
 Outlook: a lot of moving parts, but 5-8% billings growth and fairly meaningful margin compression. Autodesk provided some new guidance metrics to add benchmarks against which investors will be able to measure progress while reported revenues are in flux. 5-8% billings growth is a step towards the firm’s 12% CAGR target and the addition of 150-200k net new subscribers would be roughly 9% growth. However, taking consideration for the dilution associated with Delcam as well the financial impact of ratable revenue recognition on an unchanged cost structure, near term margins will be negatively impacted. ADSK guided for non-GAAP operating margins in the range of 14-16%, which is down from the 22.5% reported in F2014. In the interim, investors will need to focus on cash flow growth, which we believe will be close to 10% in F2015.

Bragging Rights For Portfolio Management OPK Shorts On The Run

We , we happy few, we band of brothers –

( Jack A. Bass Managed Accounts) see a rather interesting scenario now unfolding. The short interest is continuing to grow. The share float is continuing to decrease. Consequently, the percent of share float that is short continues to rise. Last of all, this is all occurring as the cover ratio begins to rise in light of a falling average share daily trading volume

Trade-Ideas LLC identified Opko Health (OPK) as a “barbarian at the gate” (strong stocks crossing above resistance with today’s range greater than 200%) candidate. In addition to specific proprietary factors, Trade-Ideas identified Opko Health as such a stock due to the following factors:

  • OPK has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $34.0 million.
  • OPK has traded 1.7 million shares today.
  • OPK traded in a range 232.2% of the normal price range with a price range of $0.84.
  • OPK traded above its daily resistance level (quality: 78 days, meaning that the stock is crossing a resistance level set by the last 78 calendar days. The resistance price is defined by the Price – $0.01 at the time of the signal).

Stocks matching the ‘Barbarian at the Gate’ criteria are worthwhile stocks to watch for a variety of factors including historical back testing and volatility. Trade-Ideas targets these opportunities because the stock is exhibiting an unusual behavior while displaying positive price action. In this case, the stock crossed an important inflection point; namely, ‘resistance’ while at the same time the range of the stock’s movement in price is more than twice its normal size. This large range foreshadows a possible continuation as the stock moves higher.

Well OPK exploded with a mighty crash
As we fell into the sun
And the first one said to the second one there
I hope you’re having fun- and signed onto Jack A. Bass Managed Accounts

Shorts on the run; OPK Shorts on the run
And the jailer man, and sailor Sam,
Were searching everyone
For the OPK Shorts On The Run

OPKO Health Inc(OPK:NYSE, US)

BuySell
9.94USDIncrease0.5899(6.31%)Volume:
Above Average
As of 28 Feb 2014 at 10:35 AM EST.

Quote Details

Open 9.46 P/E Ratio (TTM)
Last Bid/Size 9.93 / 7 EPS (TTM) -0.29
Last Ask/Size 9.94 / 2 Next Earnings 17 Mar 2014
Previous Close 9.35 Beta 0.86
Volume 2,702,171 Last Dividend
Average Volume 2,854,346 Dividend Yield 0.00%
Day High 10.25 Ex-Dividend Date
Day Low 9.31 Shares Outstanding 408.0M
52 Week High 12.95 # of Floating Shares 216.217M
52 Week Low 6.14 Short Interest as % of Float 21.53%

OPKO Health Trading Up

OPKO Health Inc(OPK:NYSE, US)

The battle continues.   ( NEWS RELEASE at end of this blog – added after trading hours)

As a result of this complex situation, we see a rather interesting scenario now unfolding. The short interest is continuing to grow. The share float is continuing to decrease. Consequently, the percent of share float that is short continues to rise. Last of all, this is all occurring as the cover ratio begins to rise in light of a falling average share daily trading volume.

This morning the stock traded down then has staged a rally – though not with great volume.

Volume has increased as the stock rises to 9.18

BuySell
9.18USDIncrease0.22(2.46%)Volume:
Below Average
As of 27 Feb 2014 at 3:00 PM EST.

Quote Details

Open 8.96 P/E Ratio (TTM)
Last Bid/Size 9.17 / 32 EPS (TTM) -0.29
Last Ask/Size 9.18 / 3 Next Earnings 17 Mar 2014
Previous Close 8.96 Beta 0.85
Volume 1,781,893 Last Dividend
Average Volume 3,165,580 Dividend Yield 0.00%
Day High 9.18 Ex-Dividend Date
Day Low 8.83 Shares Outstanding 408.0M
52 Week High 12.95 # of Floating Shares 216.217M
52 Week Low 6.14 Short Interest as % of Float 21.53%
chart

OPKO Health unit gets orphan designation for hemophilia treatment

theflyonthewall.com

5 hours ago

According to a post on the FDA’s website, PROLOR Biotech, a unit of OPKO Health, received orphan designation for its long acting recombinant Factor VIIa-CTP3 for the treatment and prophylaxis of bleeding episodes in patients with hemophilia A or B with inhibitors to factor VIII or factor IX.

Shipping Sector Recovery – Fragile

 

The shipping sector is highlighted in my new book  ” Stocks That Will Double ” – now in draft .

New orders threaten fragile shipping sector recovery:

9 hours ago – Reuters
New orders threaten fragile shipping sector recovery: surveyBy Jonathan Saul

LONDON (Reuters) – Overcapacity threatens to derail a fragile recovery in the global shipping sector as ship owners and investors place orders for new vessels betting on better times, a survey showed on Thursday.

Ship owners ordered large numbers of vessels between 2007 and 2009, just as the global economy sank into its biggest crisis since the 1930s.

In recent months, prospects have brightened as the sector absorbs the tonnage as well more positive signs for world trade. Investors including private equity players are eyeing prospects with a wave of new ship ordering taking place.

A survey of the transport sector by international law firm Norton Rose Fulbright found 40 percent of those polled cited overcapacity as the biggest threat to recovery in the industry.

“There is a real disconnect between those in the shipping sector who believe that the purchase of additional assets is the most beneficial investment for their business and those worried about overcapacity,” said Harry Theochari, global head of transport at Norton Rose Fulbright.

“While optimism is growing in the shipping sector, a further imbalance in supply and demand risks throwing the current fragile recovery off course.”

It normally takes three years on average for vessels to be delivered from yards. Data from online ship valuation and maritime intelligence provider VesselsValue.com showed the biggest number of ships were placed on order in various sectors last year since the slump.

In the oil products tanker sector, 233 medium-range (MR) tankers were ordered in 2013 – the biggest spike in orders since 2009. VesselsValue.com data showed 35 MRs were already ordered so far in 2014. The MR live fleet numbers 1,752 vessels at present.

In the dry bulk sector, there were 176 orders in 2013 for capesizes – among the biggest vessels in that segment – the biggest ordering spree since 2009. VesselsValue.com data showed in 2014, 56 capesizes were already on order. The capesize live fleet numbers 1,467 vessels at present.

The annual survey by Norton Rose Fulbright, now in its fifth year, is one of the transport sector’s leading barometers of market conditions, especially for the shipping community.

Shipping was the least optimistic transport sector in the survey, with 69 percent of respondents reporting positivity about market conditions compared with 81 percent in rail and 75 percent in aviation. The availability of funding was also a concern for shipping respondents.

The survey found anxiety in all transport sectors over a lack of suitably qualified people. Skilled personnel in the Middle East region was cited as the biggest challenge for transport businesses.

“The risk of a skills shortage developing in the transport sector has also been highlighted. Ensuring a skilled workforce is in place will be fundamental to the future growth of the transport sector,” Theochari said.

The survey canvassed views from over 850 participants from a range of companies involved in transport including financiers, ship owners and operators, manufacturers, government bodies and professional services firms. Of those polled, 380 were from the aviation sector, 215 from rail and over 260 from shipping.

DryShips Inc(DRYS:NASDAQ, US)

BuySell

3.56USDIncrease0.045(1.28%)Volume:

Average
As of 27 Feb 2014 at 10:52 AM EST.

Quote Details

Open 3.57 P/E Ratio (TTM)
Last Bid/Size 3.55 / 164 EPS (TTM) -0.86
Last Ask/Size 3.56 / 173 Next Earnings
Previous Close 3.51 Beta 2.83
Volume 2,000,903 Last Dividend
Average Volume 8,612,653 Dividend Yield 0.00%
Day High 3.59 Ex-Dividend Date
Day Low 3.53 Shares Outstanding 432.7M
52 Week High 5.00 # of Floating Shares 404.8276M
52 Week Low 1.65 Short Interest as % of Float 2.71%
chart
Safe Bulkers Inc(SB:NYSE, US)

BuySell
10.43USDIncrease0.16(1.56%)Volume:
Above Average
As of 27 Feb 2014 at 10:53 AM EST.

Quote Details

Open 11.10 P/E Ratio (TTM) 9.5x
Last Bid/Size 10.42 / 2 EPS (TTM) 1.08
Last Ask/Size 10.43 / 1 Next Earnings 12 May 2014
Previous Close 10.27 Beta 1.56
Volume 564,885 Quarterly Dividend 0.0600
Average Volume 382,244 Dividend Yield 2.30%
Day High 11.10 Ex-Dividend Date 20 Nov 2013
Day Low 10.20 Shares Outstanding 83.4M
52 Week High 11.25 # of Floating Shares 42.71572M
52 Week Low 3.80 Short Interest as % of Float 0.71%