ATCO - Atlas Corp

[finetrader]

here's the transcript:

 

http://seekingalpha.com/article/258161-seaspan-ceo-discusses-q4-2010-results-earnings-call-transcript

[gaf63]

I was gone for a few weeks and without  internet access, and came back to good news from SSW. 

In reading the conference call there was a reference to SSW acquiring the management co. , anyone have any info on that?

The JV deal looks good for SSW, allowing economies of scale and (if they bring mang. in) will increase rev. since they will manage the ships

in the JV. 

The "progressive" div. policy that they speak of will increase our divs while leaving  cash flow for growth tho it looks like it will be awhile til they get back to $2

 

Their share count is at 84.5 including A pfd's at end of 2010, and at conversion should be around 91/92 mil.- is this # close to reality??

Finetrader , I agree that they will have available cash flow for growth , and if share #'s correct and div. is 1.25 to 1.5 at 2012 end SSW will have from 162 mil to 185 mil per yr. to put toward the new ships

[finetrader]

yeah my share count didn't take into consideration the dilution from Series A preferred shares conversion to common.

 

So your numbers are more appropriate.

[Uccmal]

Deutsch Bank just put a buy on SSW shares with a target of 27.  Last week someone,  I think Raymond James moved their target to 20 from something lower.  I am thinking more in terms of the low 40s now if they keep incrementing the dividend.

[finetrader]

I have just hedged this position by shorting SPY.

 

SSW is 20% my portfolio and the two biggest risk i see are economic slowdown and additionnal vessels supply.

 

By having a young fleet and long term fixed rate contract I feel protected for additionnal supply in 2011.

And now with the SPY position, I feel like I have all the upside potential for SSW with limited downside risk.

 

I've been thinking a long time about 'hedging' or 'risk control' and believe with S&P500 above 1300 and all the 'speculation' going on by central banks this is an appropriate time to do it. So in other word, 20% of my portfolio is 'hedged'.

[lessthaniv]

Yawn!

 

Chop wood, carry water.

[Myth465]

Yawn!

 

Chop wood, carry water.

LOL

[Uccmal]

Yawn!

 

Chop wood, carry water.

LOL

 

Nice when things go your way, eh?

[Myth465]

Im slightly annoyed Nov Options came out Yesterday or the day before and my bid for a decent chunk of them never got filled. I kinda want a pullback but I guess thats a bit silly.

 

Do you really think it will trade down to a 5% yield. That would be nuts.

[gaf63]

Quote from: lessthaniv on Today at 07:57:47 AM

Yawn!

 

Chop wood, carry water.

LOL

 

Nice when things go your way, eh?

 

Very Nice indeed

[Guest VAL9000]

I think the chances are pretty slim that we'll see this trading at $15 or less any time in the near future (no guarantees), but I wouldn't be surprised if what you buy today translates into 5% yield in pretty short order (still no guarantees!).

 

The story of SSW's stock price is interesting.  I've been around this company for a long time and I have been following it very closely.  It now makes up a majority of my portfolio (I'm big on concentration - after thorough analysis) and I'm happy to see it coming up in price again.

 

SSW used to trade at about 6-8% yield consistently.  At the time, management's philosophy on financing was pretty simple: place orders, raise debt and execute long-term contracts simultaneously.  Issue new shares to raise equity as needed.  This model was effective for the first few years and indeed brought early investors considerable wealth in the form of $1.80-$1.96/year in dividends.  Management and the board used the dividend to prop up the stock price, allowing them to issue more stock at non-dilutive prices, creating a reliable source of equity financing.

 

When the World Collapsed, so did this model.  Equity raises became incredibly expensive in terms of dilution.  When the final "classic model" dividend was paid out, SSW was yielding an incredible 18%.  Clearly the market was not rewarding this model any longer and future equity raises would be highly dilutive.  SSW's management had to scramble in order to correct the situation.

 

Fast forward 2 years, and we're looking at a company that has now raised equity / lowered debt through a number of different transaction types: convertible preferred shares, sale-leasebacks, callable preferred placements and issues, and retained earnings.  The entire equity gap that was outstanding before the crisis has now been filled in a reasonably non-dilutive fashion.  Management loves to talk about financial flexibility on the quarterly earnings calls, and recently Sai Chu (CFO) went on to comment specifically on their lessons learned regarding equity risk.

 

The reason why I bring up this history is 1) to establish credibility as this is my first post on this forum, and 2) to emphasize the lengths to which management went in order to follow through with their plans while limiting the intrinsic value (as opposed to market value) cost to shareholders.

 

When you compare SSW today to SSW from 2 years ago, the fundamentals are exactly the same, except for the financing bit.  Management now clearly prefers a balanced and opportunistic approach to financing future growth.

 

So, what does this have to do with a 5% yield?  Well, I think the days of high-yielding SSW (common) shares are gone for good.  The market will no longer discount SSW based on impending equity offerings.  Combine that with Seaspan's improved position relative to its competitors, suppliers, and customers over the past two years, the recovering containerized shipping industry, and promising growth prospects - these are some of the reasons why I am convinced that this investment will continue to outperform until further notice.

 

I also think that the progressive dividend model is a signal that we won't see a rapid return to a $2/year dividend.  Instead, I expect that we will see the dividend raised in line with the number of new vessels that come on board in the previous quarter or two (and the share price will follow along with that).

 

I originally invested in SSW for its dividend yield.  I have since invested, and continue to invest today based on potential capital gains.

 

- VAL9000

[ERICOPOLY]

Pardon me, would you have any SSW?  But of course.

 

 

[Myth465]

 

The reason why I bring up this history is 1) to establish credibility as this is my first post on this forum

 

That you have done.

I look forward to your post count going up. In the mean time I will have to quite anchoring. It looks like we have dividend raises throughout the year and new ships coming online.

In my analysis I assumed that SSW would hobble along with a 10% yield  basically moving up as the dividend was raised. Your analysis makes more sense  ;D

[Guest VAL9000]

Thanks Myth, I appreciate the encouraging words.  I've been lurking on this forum for a while and I'm looking forward to contributing.

 

I think we're still going to see a bit of hobbling along in terms of tracking the dividend, but 10% seems phenomenally cheap to me.  I'm guessing we'll track at 3.5-5%.  But, to guess at how quick we'll be hobbling, take a look at the slide deck from SSW's last conference presentation, pages 7 and 8:

http://ir.seaspancorp.com/eventdetail.cfm?eventid=93850

 

CAGR for DCF over the 8 years from '05 to '13 is/was/will be 35%. So, if the price tracks the dividend, and the dividend tracks DCF going forward, then we should see some pretty quick hobbling.  Just looking at DCF ignores some pretty important stuff that Eric has brought up previously, namely the ability to roll the debt and net effect of ship scrapping, but it's a decent proxy for growth of the divvy going forward if you blunt it to, say, 20%.

 

I think Gaf is right on the money with the value of the JV to SSW.  The Carlyle deal sets up the next phase of growth for this company and presents yet another method by which SSW can obtain equity.  They might even lower their debt : equity ratio which I know would further please Eric (me, I'm not so concerned).  The next 20-30 ships will likely flow through this new structure, and I'll bet long odds that you will see more of the same: long term contracts, phased in/stable delivery cycle, and a CAGR for fleet growth and DCF of somewhere between 25% and 35% over the next 3-5 years starting in late 2012.  In addition, the profitability of these vessels could be comparatively higher given SSW's increased clout in the market.

 

And in reply to Gaf's question about the acquisition of the Manager, I haven't heard anything yet, but I think there's another incentive for this restructuring of the business relationship that hasn't been touched upon.  The Manager owns a special set of shares that were an incentive for optimizing the "classic model" approach.  These special shares pay out a kicker to the Manager based on growth of the dividend.  The kicker is 10% - 25% of the total dividend paid out to all shareholders, but it doesn't kick in until the quarterly dividend is $.485 or higher.  We're talking about $14mm - $70mm in annual incentives for $.485 - $1.00 / q dividend.  Incentives that, based on the new progressive dividend policy, are effectively going away for a number of years.  Oh, and the manager is actually who employs Gerry Wang, and it's indirectly owned by Gerry, Graham Porter (one of the Tiger guys), and the Washington family.  Soo, it's a bit incestuous but the main thing is that it's probably going away now that the model is changing and this group has identified a new/better way to make money.

 

[ERICOPOLY]

I would have preferred the full dividend with no growth in new ships.  However, that's because I had a 50% position (of my net worth) at the time I initially bitched about the prospect of new ships instead of the full dividend.  I figured I would be much better off at the implied discount that I was buying the current ship fleet at ($11 per share), and then having the full dividend repaying me (so I have cash flow to diversify into new things).  And I had 60% of my SSW in RothIRA accounts. 

 

Heck, that's the way to go if you are a small shareholder and want to optimize wealth.  But the company strategy of course that they've taken benefits the bigger boys primarily (like the Washington family) who already own so much that they can't materially (double for example) their position.

 

Then the MBI opportunity finally gelled in my head so I sold some of the SSW (only in RothIRA) at $15.75-$17.70 and today SSW is still 33% of my net worth.  I won't be selling more until the fat lady sings (roughly $24 per share unless I'm selling to go into perceived-better-value things).

 

The upside of the lower dividend policy is that most of my SSW is now in my taxable account.  Come end of July, all of the shares will be long-term so a trip to $24 by end of this year will make me very happy.

 

The reason why I'm happy at $24 is that at that point I don't think there will be much further tremendous upside compared to what else is likely out there at the time -- something always seems to come along.  I don't want to wait a long time to squeeze the last few drops out of the lemon. 

 

I also don't think it should trade at IV.  IV is not fair price.  You can boost IV just by adding more leverage -- fair price should be some risk adjusted number (well below IV in the cash of a highly levered operation).  I figure the return they get when adding new ships is probably equivalent to buying the existing fleet of ships (including newbuilds to be delivered) at about $18 per share -- so it is worth more than that for the convenience of being a passive investor, but how much more?

 

[biaggio]

" I had a 50% position (of my net worth) at the time"

 

Ericopoly, I admire your courage.

 

Any anxiety at all or lost any sleep?

 

Was it your plan from the beginning to have a 50% position or did it evolve due the low valuation

 

I hope I can have that kind of conviction some day.

 

 

 

[ERICOPOLY]

" I had a 50% position (of my net worth) at the time"

 

Ericopoly, I admire your courage.

 

Any anxiety at all or lost any sleep?

 

Was it your plan from the beginning to have a 50% position or did it evolve due the low valuation

 

I hope I can have that kind of conviction some day.

 

 

I just think it's a form of ignorance -- like, I don't fully understand the risks so therefore I'm not scared away.

 

But here is what worried me about the company, and the second point is what still worries me about it as a long term hold (although not in the near term):  

1)  Wang is a deal maker.  He isn't going to endure years of doing nothing while patiently de-leveraging.  I think that's the real reason behind the new partnership (or at least it might be what got the discussion started).  They've levered SSW so high there just isn't enough money left for him to swing big and regularly recurring deals with.

2)  Not sure about the lifetime of these ships.  Historically oil has been cheap.  Long term, dramatically higher oil (if that happens) will lead to huge efficiency innovations in ship design.  That would render the legacy fleet obsolete, perhaps a decade early?  Fuel is after all the highest cost in shipping.  Short term oil being high means slow steaming and need for new ships.  But in 15 years will there be a demand for these fuel guzzlers?

 

[ERICOPOLY]

But yes, it evolved due to low valuation.  Was 20% initially -- a good deal of which I'd bought a bit over $12.  Then in July it went to $10+ change and I bought more, then under $10 I bought more.  Average cost comes to $11.

 

I should really have more of a process but I don't -- I react emotionally when stocks drop.  But I get a greed reaction, so I tend to overdo it.  Then I whip out the calculators and figure out how much I'll make when SSW restores their full dividend -- then I get anchored to that level of expected dividend and don't want to sell any shares.  Now that the stock has rallied somewhat, I then lose much of my emotional argument for buying in the first place so I get an urge to sell some.

 

I tend to load up on seemingly obvious winners because I lack the ability to understand the more complex ones?  Once the discussion turns to inventory turnover and all kinds of MBA metrics I glaze over and I'm lost.  I understood the logic behind FUR, SSW, FFH, C, BAC, and I tend to believe I understand MBI. 

 

Very simplistic, which is why I'm willing to concede that it may just be relative ignorance and psychological faults that are the real cause here.  One of the investors that come to mind is Forrest Gump -- the guy just plowed all of his money into an fruit company and held on until he was ridiculously wealthy.  Most people are scared by tech stocks, but not him.  His advantage is that he didn't realize it was a tech startup.  I don't think I'm quite as bad as him, but it's shades of grey.

[Myth465]

But yes, it evolved due to low valuation.  Was 20% initially -- a good deal of which I'd bought a bit over $12.  Then in July it went to $10+ change and I bought more, then under $10 I bought more.  Average cost comes to $11.

 

I should really have more of a process but I don't -- I react emotionally when stocks drop.  But I get a greed reaction, so I tend to overdo it.  Then I whip out the calculators and figure out how much I'll make when SSW restores their full dividend -- then I get anchored to that level of expected dividend and don't want to sell any shares.  Now that the stock has rallied somewhat, I then lose much of my emotional argument for buying in the first place so I get an urge to sell some.

 

I tend to load up on seemingly obvious winners because I lack the ability to understand the more complex ones?  Once the discussion turns to inventory turnover and all kinds of MBA metrics I glaze over and I'm lost.  I understood the logic behind FUR, SSW, FFH, C, BAC, and I tend to believe I understand MBI.  

 

Very simplistic, which is why I'm willing to concede that it may just be relative ignorance and psychological faults that are the real cause here.  One of the investors that come to mind is Forrest Gump -- the guy just plowed all of his money into an fruit company and held on until he was ridiculously wealthy.  Most people are scared by tech stocks, but not him.  His advantage is that he didn't realize it was a tech startup.  I don't think I'm quite as bad as him, but it's shades of grey.

 

Hey man dont change whats worked, and if it aint broke dont fix it. If you were a 2 - 5% in terms of positioning size, I would guess you would be a 9-5er. Just make sure you have enough capital on the side would be my take away.

 

Also this quote made me think of your process, its something I will have to keep in mind - The market does 95% of the work for you - your problem is not to duplicate research but to identify errors of logic in company evaluations.

 

 

I just listened to the call, and you are right. Wang is a deal maker. I doubt this recover, and honestly doubt China's ability to retain their dominance. I think at some point they may be overexposed but what do I know. Also everyone tends to order ships at the same time. Containerships may end up like dry bulks or oil tankers if everyone gets excited. With that said and the new dividend policy I do think you guys are right. I may have to up my bid.

[ERICOPOLY]

Well I saw one of the interviews where Wang was talking about China and how it's growing and people are optimistic and etc...  Then I think about the amount of ships they ordered in 2007...  It's funny because the Washington family is already beyond ridiculously rich... what's up with all the risk for the extra couple of percentage points of compounding?  They could be unlevered and just sail into the sunset.  But that's the problem with me as well.... sailing into the sunset is boring.  These guys just seem to seek maximum excitement.  Maybe it takes one to know one.

 

They've offset their aggression with long-term contracts, strong counter-parties, interest rate hedges, and whatnot.  So they probably feel like the race car has a nice roll cage and thus they won't get hurt.  And it's true that race cars with roll cages are much safer... but just driving the car slower has it's benefits too.

 

So I just want to be paid for the risk.  At these prices at least the stock is still priced at roughly (for the cost of buying the existing fleet per share) the same as where fresh money buys a new ship.  But once the stock is like up to the mid-20s then you are holding at a cash flow yield that is much lower than where the market is pricing new ships in the current rate environment (ships become overvalued on a per-share basis).  So I don't think the risk-adjusted metric at that point is anywhere near as good.  However it will be interesting when they trade at a premium because they will likely issue shares to raise capital at this lower cash flow yield per share and then reinvest the money into yet more ships... taking advantage of the cash flow yield delta -- but that delta only exists if the new ships ordered are similarly leveraged (the max).  But look, there's just no way I'd have anywhere near this much SSW at those prices.

 

[Myth465]

They have a good model but have only dealt with renters not wanting to pay, what happens when ship renters cant pay is one thing the business model hasnt taken into account.

 

Like you said, at that point I will be long gone so it wont matter much.

[ERICOPOLY]

Their race car carried a couple of airbags (wholly owned ships) -- but from what I can tell they've already blown out the airbags in the sale-leaseback transactions and seem to be disinterested in having them replaced for the next crash.  They may still prove my worries unfounded on this point, so it's too early to say.

[Uccmal]

I always have Margin of Safety in mind.  

 

If China blows up badly, which is a very real possibility what will happen with SSW - as you said Myth renters may decide or may not be able to pay at all.  I dont know anything about Chinese bankruptcy law as applies to entities that are partially or wholly government owned.

 

That we are heading to an oversupply fo containerships seems like a real possiblity.  I think this explains part of the stock pop this past two weeks.  JV will be taking the newest risk and be down the quality ladder as far as customers, at least at first.

 

Eric, your psychological analysis is spot on as far as i can tell.  They are all dealmakers.  However, once long term leases are in place, ships built, and a long term operating regimen is in place, it is not inconceivable that Wang leaves SSW and has his management company run things mostly without him there.  

 

Finally, I hold about a 10% position in SSW - 4th largest.  As per any company I hold, I will sell when other opportunities begin to look better, or if it starts to look worse.  For now, it has lots of mileage left.

[gaf63]

The Street.Com jumps on the bandwagon today,

 

http://www.thestreet.com/_yahoo/story/11065006/1/7-companies-to-post-big-profit-gains.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

 

Thinking of pulling some SSW off the table and wait for pull back in this market

[Myth465]

The Street.Com jumps on the bandwagon today,

 

http://www.thestreet.com/_yahoo/story/11065006/1/7-companies-to-post-big-profit-gains.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

 

Thinking of pulling some SSW off the table and wait for pull back in this market

 

I just got back in with Nov calls. I paid much more then I would have prior to the run. Now have to figure out how to get back into pulp. Basically with SSW I took my stock gains from SSW common and put it in calls. Raised cash and have a similar interest.