Danaos: Cheap price but could stay cheap for a while (NYSE:DAC)

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Danaos Corporation (New York Stock Exchange:DAC) is a Greek shipping company that was founded in 1963 and went public in 2006. They have a fleet of 71 ships, 45 of which are debt-free. Below is the long-term stock performance:

DAC Stock Price CAGR

dividend channel

This cyclical stock has underperformed since the IPO but reached a turning point during covid. Below are the return on capital metrics:

Company

CAGR of 10 years of income

10-year average ROE

10-year average ROIC

10-year EPS annual interest rate

FCF/share 10-year CAGR

CAD

3.9%

11.3%

1.9%

40.7%

n/a

SFL

5.7%

9.6%

3.9%

-1.8%

n/a

RSMC

7.6%

11.9%

3.8%

8.5%

n/a

GOGL

36%

-0.8%

-0.5%

-7.8%

-13.1%

GSL

9.9%

5%

two%

11.7%

n/a

NMM

14.3%

two%

1.1%

2.9%

-9.3%

Freight rates have skyrocketed since covid started and have calmed down a bit lately. Shares of most shipping companies followed these rates and saw a similar rise.

global freight rates 2019-2022

statist

Reinvestment is not too complicated in this industry as it means acquiring more ships to add to the fleet. For example, last year the company acquired six second-hand boats for $260 thousand USD.

Next we see that cash flows are more stable than net income alone:

Year

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Operating profit

282

292

262

285

2018

187

199

201

199

358

Free cash flow

-209

142

153

271

257

177

156

199

95

72

Net income

-105

38

-4

117

(366)

84

(33)

131

154

1,053

capital allocation

Despite being a fairly cyclical industry, FCF has remained more consistent than earnings, as the chart above shows. The share count gradually increased until it peaked in 2020, and is down just 16% since then. Dividends were paid in 2007 and 2008, but were reduced until they were restored last year. While capital allocation generally becomes more important the larger and more mature a company becomes, I believe that increasing the fleet should be a higher priority than returning capital to shareholders.

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Risk

In terms of downside risk, I see very little, especially at today’s price. More on price in a bit, but trading fundamentals are intact barring a black swan disaster. Debt seems high when looking at the debt/equity ratio at 3.8, but long-term debt was double that in 2013. They have been paying down debt steadily and I would prefer this effort to continue for now rather than increase shareholder returns, which I often prefer.

Valuation

The stock is down about 40% from last year’s high, but stocks often trade at a low P/E.

historical PE ratio for DAC

macro trends

Below is a comparison of price multiples:

Company

EV/Sales

EV/EBITDA

VE/FHR

P/B

Division Yield

CAD

1.6

2.5

3.4

-0.5

4.9%

SFL

4.1

6.3

-7.2

1.4

8.8%

RSMC

2.8

4.3

50.6

0.7

4.6%

GOGL

two

3.6

3.7

0.9

27.8%

GSL

3

5.8

-6.4

0.8

8.4%

NMM

1.3

2.2

4.6

0.4

0.7%

Net margins are distorted by earnings from shares held by ZIM, and the company no longer holds a position. EPS should normalize as ZIM stock gains gave a big boost to net income and EPS. So I used 2020 EPS in the dcf model below:

dcf model for DAC

chimpanzee money

conclusion

The price does not reflect the great importance of a company like this in the world. There is very limited downside risk aside from a market crash that sweeps everything away. The fundamentals are intact, management has a long-term view, and the price is low. This is definitely not a low-quality business, but I’m not convinced that investors can achieve anything more than a dividend yield plus multiple expansion at some point.

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There is not enough intrinsic value growth over time to consider this a long-term investment, despite the current undervaluation. The biggest risk right now is that multiples will stay low for a long time, with the dividend contributing to all or at least most of your return.

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