Time to load up on container ship stocks

Fleet on its feet

That got Wang thinking. He went home and called up some business acquaintances and proposed that they borrow some money and partner up to create a company that would buy container ships cheaply and put them out on long-term charter to the Chinese and other carriers. He obtained the backing of Montana copper and construction magnate Dennis Washington, who owns Washington Group International (WNG, news, msgs), and together they persuaded some European banks to provide financing.

Wang's big idea was to create the Southwest Airlines (LUV, news, msgs) of container ship lines. He wanted all new ships to be interchangeable so they would be easy to run and maintain. He wanted to be the low-price leader, and he wanted to grow by at least 15% per year. In the late 1990s, with shipping at low tide, he was able to buy five new ships from Samsung Heavy Industries and needed to wait only 13 months. Demand is so strong now that, if you can find a ship maker who will take your order, you have to wait four years.

Seaspan's fleet is now up to 47 new container ships, and all are on 10-year fixed-rate contracts. On Monday, the company announced that it had ordered eight more ships from Hyundai Heavy Industries in South Korea for $132.5 million per vessel, to be delivered between the end of 2009 and the end of 2010. Each of the ships has already been chartered to the Chinese container ship line Cosco on a 12-year lease with three additional one-year options.

Wang shoots for a return on invested capital of 12% and does that by borrowing 60% and using 40% cash. He focuses closely on "counterparty risk," which means that he will charter out only to the top 15 shipping lines in the world. He doesn't want deadbeats in his accounts payable.

Floating warehouses

Why container ships? They are the least exposed to spot pricing and the easiest to operate. They are truly the motive power behind world trade, as they have become an integral part of the international supply chain. Many companies, such as Wal-Mart Stores (WMT, news, msgs), are trying to skip the step of warehousing goods altogether. They manufacture in China, ship to the United States in a container on one of Seaspan's ships and then have their trucker pick up the box and deliver it straight to one of their distribution centers or even directly to a store. In essence, container ships have become floating warehouses.

Seaspan has been using its formula to grow earnings around 30% a year and pay a 6% dividend. Wang has pledged to systematically increase the dividend while at the same time preserving around 20% of earnings each year to buy more ships. His intermediate-term goal is to get to around 125 ships by 2012 as long as he can continue to earn the same return on capital.

I'm a huge fan of this strategy and recommend that both conservative and growth-oriented investors take advantage of a recent dip to buy Seaspan shares for my 2008 target in the mid-$30s. Add the juicy 6.2% dividend yield, and you're looking at potential for 30% in total return over the next year. I can hardly contain myself.

Fine Print

To learn more about Seaspan, visit its Web site. To learn more about Danaos, visit its site. . . . A container-management company went public this week: CAI International (CAP, news, msgs). Check out its Web site here. . . . . Learn more about the Baltic Freight Index here. . . . Would you believe there is a book about containers and globalization? It's "The Box" by Marc Levinson.

At the time of publication, Jon Markman owned shares of Seaspan and Danaos.

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