NAV – Not Always Valuable

[Monday, November 13, 2023]

We write this week from the middle of shipping company earnings season.  It can be perplexing.  Sometimes a company in one segment will miss by $01 versus consensus, give positive guidance, and their stock price will still be down 10% in five days.  A different company in another segment misses, gives weaker than consensus guidance for Q-4 2023, and is up 6.80% after the earnings call.  These are two ripped from the headlines occurrences from this past week.  We rationalize this behavior via expectations going into the call, which drives how markets interpret the results.  Sell side analysts will share their opinions after the earnings release, frequently with buy, hold or sell recommendations.  We are sympathetic to the analysts, and it is easy to throw stones.  However, we noted this week too much reliance on Net Asset Value (NAV) in determining their recommendations.

NAV is basically the market value of the ships based on recent transactions.  It has its weaknesses.  There is no haircut for selling a fleet of ships simultaneously, or the condition of the vessels.  One theoretically should also determine the future value of the vessels. And most importantly, NAV says management doesn’t matter.  We are certain of a few things in life. Supply and demand.  And in shipping, more so than other businesses, management is vital to the success of a long-term equity investor.

We would be hypocritical if we said we didn’t look at NAV.  It is an arrow in our quiver.  We would rather own a great company at 1.0x Price/NAV then a similar company in the same segment trading at .70 Price/NAV. Over the long-term management makes a difference.  On the other hand, we will look at segments where all the publics are cheap on Price/NAV, such as dry bulk shipping today. In this segment, one can buy great management teams at a discount to their companies’ steel values.  Over time, in similar situations, we have done well for our investors using NAV properly.  Like any valuation metric, it is not the absolute number itself, but how one uses it.