Trailer Bridge TRBR
March 04, 2001 - 6:50am EST by
2001 2002
Price: 2.53 EPS -0.04
Shares Out. (in M): 10 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 47 EBIT 0 0

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Trailer Bridge

Business: Trailer Bridge is in the shipping business between Puerto Rico and the United States.

I think that Trailer Bridge is a buy because it is a $2 1/2 stock that could potentially earn as much as $3 per share in a few years if they can improve pricing and capacity in the Puerto Rican market. This is a high risk investment, if I am wrong the stock is likely a zero. On the other hand, I feel that there is a reasonably high probability that they turn their market around.

What you might ask would make me think that a stock that currently has breakeven profitability will suddenly be able to earn $3?

NPR, the largest player (35% market share) in the U.S. - Puerto shipping market is likely to be liquidated.

NPR has been rumored to be going out of business for the last 5 years. NPR was saved a few years ago when it was acquired by the Holt Group from Philadelphia. It's time however is running out. On January 15, 2001, the Holt Group missed a bond coupon and has entered discussions with its bondholders to reorganize. On Feb. 15th, the announced that the bondholders have extended the deadline until March 15th to come to agreement on a reorganization plan (or at least the framework for one).

In my opinion, the result of this reorganization will be the liquidation of NPR. The Holt Group consists of NPR and a presumably profitable stevedoring business in Philadelphia. The Holt Group has negative cash flow from operations and a massive debt load of $289 million. As of 9/00, they were down to $3 million of cash. Rumor has it that Holt himself gave the money to pay the last coupon. Given the stevedoring business is profitable, NPR must be bleeding the operating cash flow. In addition, they have massive cap. ex needs to maintain their rusted out fleet of boats. (Their boats are the oldest in the market with an average age of 28 years. TRBR's boats are less then 10 years old on average. These boats are supposed to be retired at age 20). The situation will only get worse. TRBR is leading prices lower and NPR's cap ex needs will increase as they to maintain their ancient fleet. I have heard rumors that they are having difficulty even finding ship yards to do the work. Even if I am wrong and the company is not liquidated today, the economics of running these old ships will sink NPR in time.

How do I get to my $3 earnings number?

TRBR owns or leases 7 ships, 6 of which are in use. 1 was added to use in 4Q00. To earn north of a $1 a share they have to get their volumes up to full capacity on the southbound portion of their trips with all 7 ships in use. By full capacity, I do not mean 100% of capacity on every trip, which is unrealistic, but a reasonably calculated measure of full capacity. To get to $3 in EPS, they need to raise prices by 20% to where they were 3-4 years ago. Given that they only have low teens market share, the demise of NPR would clearly allow they to take up the slack on a volume perspective. Given that they are price leaders on the downside, they are in control to start raising prices when the time comes.

Alternatively, the shipping business has a large amount of fixed costs. TRBR estimates that their variable costs are in the 35% range. You could use those figures to calculate similar figures.

But most importantly, these are the numbers that the company has put out to investors. On the last conference call (I don't know how many people were listening…there were no questions), John McCown said that is was no longer a matter of if they earn $3 a share, but when.

Other positives:

- They have a lower cost structure because they use barges and tugs rather than deep hulled vessels
- They are the only shipper in PR that has been consistently gaining share.
- They have been the price leader to the downside, so they control the decline in prices for the moment.
- Their boats are more environmentally friendly than their competition.
- If Cuba opens up they will be the first people who can ship goods to Cuba. (50 of the 51 ports in Cuba aren't deep enough for deep hulled vessels, but are for their barges and tugs)


I am not saying that the shipping business is a good business. I am not saying that there are any barriers to prevent anyone doing exactly what they are doing with barges and tugs. I am not saying that additional capacity may be added to be market triggered by a NPR liquidation. I am not saying that TRBR doesn't have a liquidity issue of its own. I am not saying a weak economy isn't terrible for shipping stocks. All of these are true, but I feel that the risk return is very favorable.

Comments on the 4th Quarter:

The fourth quarter is their biggest quarter with holiday sales. As of the 3Q conference call, they were expecting to have such a good quarter that they would be profitable (if only slightly) for the year. I feel that due to the weakness in the economy they may fall short of profitability. Should they miss and the stock trade down, this would be a excellent buying opportunity. While I wouldn't dream of trying to call a weak economy a positive for TRBR, there is a silver lining in that I may scare away any one with the "bright" idea of trying to operate NPR as a going concern.


NPR (a competitor with 35% market share) is likely to be liquidated by Holt Group Bondholders now that they have missed a coupon payment. Keep in mind that their are a lot of fixed costs in the shipping business, so a lot of incremental revenue could flow to TRBR's bottom line.
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