Tuesday, June 22, 2010

Bought OSG

If you are a first timer, please read the following pieces first. It will provide you with important background information.
1. Why I created this blog?
2. How am I going to operate this blog?

I sold my last Coach holding on June 15, 2010 for $8,824.90 and paid $5.10 commission. And finally, I got my hands on OSG. I bought 100 shares on March 26, 2010 for $3, 990.

If a public listed company in the last five years reduced shares outstanding by one third, doubled its revenue, book value and dividend, what valuation should Mr. Market assign it to? Let me add its current asset plus two years of free cash flow can pay off all its debt!

What if I add that its net margin is 18.6%, return on equity is 18.4% and return on capital is 8.2%?

Currently, its stock is sold for half of its book value, less than 3X free cash flow and about 3X earning. Furthermore, it yields 4.88%.

Yes, it is Oversea Shipping Group (NYSE: OSG). Its management is very smart, selling OSP for $19 per share in 2007 and are buying them back at $10 per share in 2009. The company owns the most modern fleets in the industry and 100% of the fleet is double hull. It has a strong balance sheet with ample liquidity. It is buying back its own shares like crazy and it is buying back shares of its subsidiaries. In Nov 2009, its book value is $68.90.

Why is it trading at this low? It is in a highly cyclical industry and 65% of its revenue is from highly volatile spot market charter rates. In the last 10 years, it lost money only once, in 2002, it lost 51 cents per share. Now, if the world economy keeps deteriorating, energy price goes out of the bottom, OSG will continue to sell its ships, reduce its operating expenses and paying its dividend. I believe it can do these things for at least 3-5 years. Actually, I am not that permissive to believe the global economy will remain in the dump. But I will not try very hard to convince you otherwise either.