Keeping with the capital allocators theme I’ve been posting about recently, I present to you the 2012 annual letter of Seacor Holdings Inc. (ticker: CKH). The letter is written by the company’s chairman, Charles Fabrikant – who was recently named the Buffett of Barges by Barrons.
The long thesis for the stock was recently written up on VIC – which basically can be summed up in three points: 1) great management with extraordinary capital allocation skills, 2) tailwinds in industry will propel trough EBIT numbers in the next couple years, 3) non-core assets when backed out make operating business look very cheap relative to normalized profitability.
I’m not going to go into great detail about the business since you can read about it here – www.seacorholdings.com.
Suffice it to say, the last two years have been difficult ones for Seacor. The offshore marine segment – which basically provides support vessels to offshore rigs and represents a sizable chunk of overall operating profits – has shown especially weak results in the last two years due to industry-wide overcapacity and weak demand after the BP spill. This has translated into persistently low day-rates and exceptionally poor utilization of its fleet.
However, there are signs that things are starting to take a turn for the better as the deep-water rig population has been slowly increasing again. On the supply side, things have also improved as some ships have been taken off-line due to low prices while aging ships continue to be retired.
Considering the fixed cost nature of the business, as the cycle turns, it won’t take much in revenue growth for ROE’s to revert closer to their historical mean (contribution margins are in the 80 to 90% range). I also expect Fabrikant, and his team, to do their usual thing and capitalize on any froth that might emerge by selling assets into a hard market to book gains.
Beyond the operating segments, Seacor owns a number of equity and JV investments in non-core assets that if we subtract from the EV at book (could be worth more) gives us an adjusted number of around $1.3 billion for the shipping operations. Thus, the implied market value for the operating businesses is ~5x my estimate of normalized EBIT ($250 to $300).
It is worth noting that the company uses very conservative accounting, and doesn’t capitalize maintenance capex, so the OBITDA-based segment economics they quote in their financial statements seem appropriate for estimating internal returns.
I normally avoid cyclical / commodity type businesses like the plague. But Seacor is an exception.
The team, not only Fabricant, in addition to being good operators arguably have value investing in their blood – focusing on capital allocation by opportunistically buying assets on the cheap in soft markets and selling them when prices and utilization are high. Judging by the company’s CAGR in book-value – which is neatly highlighted in Berkshire-fashion on page. 11 of the letter – Seacor has astutely managed their business with shareholder value in mind.
Disclosure: I and/or others I advise own shares of CKH
2012_Stockholder_Letter
