CASE STUDY: Genco Shipping (GNK)

(Zen Buddha Silence by Marilyn Barbone)

(Image: Zen Buddha Silence, by Marilyn Barbone)

November 7, 2021

Here is the performance of the Boole Microcap Fund this year and since inception (06/09/20).

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2021 net return (thru 11/09/21) 54.3% 31.5% 26.6%
2020 net return from inception (06/09/20) 21.1% 31.7% 16.3%
Compounded annual return (net) 36.7% 31.6% 21.3%
Overall gain (net) 86.9% 73.2% 47.2%

I first wrote up the idea of GNK in June 2020 here: http://boolefund.com/genco-shipping-gnk/

At the time, the stock at $6.94 a share was very cheap based on our five measures of cheapness:

    • EV/EBITDA = 4.60
    • P/E = 6.52
    • P/B = 0.34
    • P/CF = 2.07
    • P/S = 0.70

Now the stock is up to $15.81.  There has been a huge increase in dry bulk shipping rates.

Dry bulk shipping rates are highly volatile.  But the supply of dry bulk ships is at a historic low.  Very few new vessels will come into the market over the next couple of years.  If someone wanted to order a new dry bulk ship, they would have to wait until early 2024 to get it.  There are far fewer shipyards than has been the case historically, and most of those shipyards already have orders, much of which is for container ships rather than dry bulk vessels.

Global GDP is expected to be 4% to 5%, which when coupled with the historically low supply, will probably lead to higher dry bulk shipping rates going forward.

Also, the company has a barbell approach to fleet composition: The minor bulk fleet provides stable cash flows, while the Capesize vessels provide meaningful upside and operating leverage if rates continue to move higher.

The market cap is $662.8 million.  EV is $915.1 million.  Normalized estimates: Revenue $620 million, EBITDA is $320 million, net income is $250 million, and cash flow of $360 million.

Here are the multiples based on normalized estimates:

    • EV/EBITDA = 2.86
    • P/E = 2.65
    • P/B = 0.53
    • P/CF = 1.84
    • P/S = 1.07

(P/B is based on P/NAV.  Vessel values have increased due to the increase in shipping rates.)

Because of the large increase in rates and the expectation that rates will remain volatile but high, GNK looks cheaper now than it was in June 2020.

Insiders own about 7.4% of the shares outstanding, which is worth about $49 million (at today’s stock price of $15.81).  Insiders will obviously do well if they successfully lead the company forward.

Genco Shipping has a Piotroski F_Score of 6, which is OK.

Debt is fairly low at $296.8 million.  TL/TA is 29%, which is good.  Also, the company is targeting total debt of zero.

Intrinsic value scenarios:

    • Low case: GNK is probably worth at least 50% of NAV.  NAV/share is $29.72.  50% of that is $14.36, which is 9% lower than today’s $15.81.
    • Mid case: Dry bulk rates are likely to stay relatively high, due to limited supply.  Also, the company will soon have no debt and plans a substantial dividend.  In this context, GNK is probably worth at least 140% of NAV.  That works out to $41.61, which is over 160% higher than today’s $15.81.
    • High case: If dry bulk rates continue to move higher over the next few years, GNK could be worth a P/E = 10.  That works out to $59.62, which is over 275% higher than today’s $15.81.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

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