Two Votes for Greek Shipper

12/02/2005 12:00 am EST


Marc Gerstein

Editor, Forbes Low-Priced Stock Report

Ken Kam focuses on the top ideas from among 60,000 stock pickers who run virtual portfolios. Marc Gerstein specializes in "screening" to isolate the best value and growth stocks. Despite different approaches, both agree on the outlook for this Greek shipping firm.

"Incorporated in Bermuda and managed out of Greece, Tsakos Energy Navigation Ltd. (TNP NYSE) operates a diversified fleet of 25 modern tankers for the transportation of energy products," notes Ken Kam, in his Stock Alerts service. "The company is scheduled to take delivery of a further 11 newbuildings in 2006 and 2007. The company is 60% contracted for 2006 and has an active buyback program. TNP has a sizable dividend and is trading in the middle of its 52-week trading range. The company is dependent on continued growing demand for energy products.

"The ‘best’ investors increased their holdings in the stock by 25%. At the same time, the ‘rest’ decreased their holdings by 3% Tsakos has seen steady accumulation by the Best Investors since the summer of 2003 when the stock was trading at $15. Since then, worldwide demand for energy has soared and TNP shares have appreciated significantly while paying a sizable dividend. However, as energy supplies have built up during this seasonal period of moderate weather, TNP shares have declined. The Best Investors see that as an opportunity and have significantly increased their holdings over the past month."

Adds Marc Gerstein, editor of the Reuters Value Review, "Tsakos Energy owns a fleet of modern tankers providing worldwide marine transportation services for national, major and other independent oil companies, and refiners under long, medium, and short-term charters. Its fleet consists of 27 tankers. In addition, the company has contracted for the building of additional 13 vessels and has signed a letter of intent for two further vessels.

"Earnings per share are now at very elevated levels due to strong spot pricing in the tanker market, a function of strong world trade including transport of oil, not just to developed countries but also, in increasing amounts, to India and China. Can earnings remain at or near present levels? At present, the consensus expectation calls for some slippage, but not much (some oil stockpiles need to be replenished based on seasonal factors and previously shut-in capacity).

"As to TNP specifically, estimates now call for a modest increase in 2006, as opposed to past expectations of decline. There are two company-specific specific factors at play here. One is that TNP is more balanced between spot pricing and contract (charter) pricing than is the case for many peers. The company caught some criticism for that as spot prices soared; now, it doesn’t look so bad. Another factor is TNP’s very modern fleet, which may enjoy extra demand and pricing power.

"Perhaps the most interesting aspect of TNP is its ship ‘newbuild’ program. The best way to visualize the situation is as an analogy to a stock investor who loads up at the bottom of a bear market. That’s essentially what TNP did with its ordering. Now that demand has improved, TNP finds itself in a situation where it could make a profit just by selling ships that it hasn’t even taken possession of. In other words, it’s an asset play. I’ve seen estimates that peg the unrealized appreciation value of the firm’s newbuilds at $12 per share.

"Based on my analysis, I peg TNP’s potential five-year earnings per share growth rate at 13.6%. Bear in mind, however, that no analysts are publishing any long-term projections. I figure we’d need a 10.7% growth rate to justify the stock price. Meanwhile, the stock yields 5.4%. Dividend growth prospects are way too uncertain for me to suggest that TNP could qualify as a pure income play. But even as a secondary income vehicle, it’s still a nice add-on to the basic investment case."

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