Money and Investing Thoughts

Ship Finance International Ltd (SFL: 12.11 +0.41 +3.50%) came out with their formal 1st quarter earnings and conference call yesterday. This follows the announcement of a new mega-lease deal and dividend increase announcement a few days earlier. As expected Ship Finance had a fine quarter with good news for the future.

First up, the dividend: A little different from what I read into the earlier press release, the 1st quarter dividend will be 56¢, up a penny from Q4, and the dividend will be increased to 58¢ in the 3rd quarter. This give an total increase of 12¢ per year going forward, a 5.5% increase on the current dividend. On the conference call, management indicated they are working toward future increases.

Net cash flow per share came in at $1.96 including 46¢ of profit share and net income of 82¢ for the quarter. The cash flow was up 14% from the 4th quarter of 2007 and show the effects of the company’s continued growth of their fleet. Also, there is definitely plenty of coverage for the dividend.

Included in the quarter’s earnings was $33.7 million in profit share from Ship Finance’s agreement with Frontline (FRO: 4.92 +0.02 +0.41%). This agreement pays SFL 20% of the revenue above a fixed daily rate FRO earns on the 39 tankers FRO has financed through SFL. This amount is over double the profit share earned in the Q4, 2007 and tanker spot rates are higher in Q2 and projected higher for Q3 and Q4. Ship Finance earmarks the profit share money as capital for ongoing fleet expansion. Over the last 4 years the fleet has grown from a value of $2.1 billion, all oil tankers, to 73 vessels worth $7.0 billion and half in dry bulk, container and off shore. There is currently $1.5 billion of new buy/lease business on order.

I believe Ship Finance offers a great combination of growth, growing income and conservative management. I expect to be holding shares in this company for a long time.

Note: I have a long position in SFL.

Business – Area home sales bounce back – sacbee.com

The area referenced in the title is the Sacramento region. I wrote a few days ago about some stabilization in the real estate market there, and this article from the Sacramento Bee is more positive news. The fact that caught my eye is that Sacramento county had its first year over year sales gain in 37 months. Many on the Internet are still embracing a continued housing slow down because year over year numbers keep falling. Here are some facts I gleaned from the Sac Bee article and related blog:

• April sales in Sacramento county were 24% higher than April 2007. Two other nearby counties also had year over year gains.
• There were 12,606 homes for sale in the 4 county region down from a peak of 16,262. The April sales totaled about 3,000 homes, showing a current 4 month supply.
• New home sales were still down with 454 sales vs. 687 in April 2007.

Anecdotal stories have buyers coming out as home prices have fallen back to 2003-2004 levels and aggressive bidding for foreclosure homes under $300,000. However, there will still be quite a bit of foreclosure inventory to absorb before more normal market conditions return. If the home builders are not building at this time and working off their inventory a positive pricing trend could be here sooner than many expect. Pricing has remained strong in the San Francisco area, which tends to start pushing people out towards the central valley, looking for affordable housing.

This information pertains specifically to the Sacramento region and one month does not a trend make. I report on it because I am familiar with the market and it was one of the worst “offenders” during the price run up.

This is my weekly recap of the NEX index, the WilderHill Global New Energy Innovation Index. The NEX is tracked by the PowerShares Global Clean Energy Fund (PBD: 9.73 +0.259 +2.73%). The results posted here are for the week that ended last Friday (May 16).

The NEX had a pretty spiffy week, gaining 6.3%, compared with the S&P 500, up 1.6% and the NASDAQ, up 1.1%. Digging up my posts for the past weeks since the recent low in mid March, the index is up 20.7% since those lows. In the different sectors, solar let the way up 7.9% with wind power close behind at a positive 7.5%. Of the seven sectors, only one was in negative territory, with hydrogen and fuel cells sliding 1.2%.

Here are the top and bottom stocks from the index for the week:

NEX top gainers since 13/05/08
Aventine Renewable Energy Holdings AVR + 37.5%
Zoltek ZOLT + 24.4%
Gushan Environmental Energy GU + 22.8%
Hansen Transmission HSN + 22.2%
Novozymes A/S Series B NZYM’B + 22.0%

NEX top losers since 13/05/08
Verenium VRNM - 8.9%

Medis Technologies MDTL - 7.1%
EnviTec Biogas ETG - 6.7%
Zhejiang Yankon Group 600261 - 6.2%
Centrotec Sustainable CEV - 6.1%

Note: I currently do not have a position in any security listed.

SFL – $850 million acquisition of an ultra-deepwater drillship and intention to increase quarterly dividend

I have considered Ship Finance International (SFL: 12.11 +0.41 +3.50%) a core component of this site’s income portfolio. The press release above announces the single most expensive sale/leaseback transaction in maritime history. The benefit to SFL after interest and principle payments is 32¢ per share. Ship finance will be borrowing $700 million and the balance will be out of company fund. The drillship will complete construction in June and be on a 15 year bare ship lease fully guaranteed by Seadrill Ltd. This is SFL’s first acquisition of a deep water drilling rig and I find the timing interesting after reading this article on Seeking Alpha recently: Petrobras is Hoarding the World’s Deep Sea Drillers

At the same time, SFL announced they will increase the quarterly dividend 2¢ to 57¢. This is good news after several quarters without an increase. Ship Finance is conservatively managed and has more than adequate coverage for the dividend. It is good to see them putting some capital to work to increase the return to shareholders. I am looking forward to the earnings release on Thursday! SFL is a component of this site’s Income Portfolio.

Note: I have a long position in SFL.

I spent some time over the weekend scanning through the Fortune 100 Fastest Growing Companies for 2007 for companies that interest me. I would look at the company’s business, recent sales and earnings, and future earnings projections. No calculator, just an eyeball on growth rates vs. PE. It was interesting, since the list was compiled in mid 2007, how many companies on the list had had recent earnings set backs. While going through the list I noted some personal likes and dislikes of company attributes that cause me to look favorably or unfavorably on a stock.

Some of my dislikes:

• Companies that have business selling to other companies. There is something about a company that is reliant on another company or industry to manufacture good products and sell them profitability that I avoid. Even if the company is the best around and well run, bad economics or management by their customers can seriously affect the suppliers bottom line.
• Faddish retail companies. Clothing lines, beverages and restaurants. These can all lose ground to the next hot item if they do not come up with the next hot item themselves.
• I have a tendency to avoid all health care and pharmaceuticals. Although health care sucks up a huge portion of the U.S. GDP, I just feel the whole thing is propped up by ever increasing costs that will someday collapse. I am probably entirely paranoid here, but I do not invest in this area.
• Fast growing companies with no earnings set off warning bells in my head. It is my belief that it is easier for a company with hot products or in a hot sector to grow revenues than earnings. A hot company has to start bringing significant dollars to the bottom line before I get interested.

Some of my preferences:

• I gravitate to companies with market capitalization between $500 million and $2 billion, plus or minus. I believe companies this size are big enough to have established themselves, but too small for most of Wall Street to have found. Often they have between 1 and 4 analysts following them and good information is hard to find. Maybe I can find a nugget of news that shows me the market has miss-valued the stock.
• I like industries with products people and business must have: Energy, transport, gambling, banking., infrastructure. Well run companies in these business can often count on a certain built in customer base and work to maintain or improve margins.
• I get interested in a company that has a business or niche I have not previously heard of. This might be a company that has carved out a profitable niche by offering a unique product or service. I will read deeper to see if there is more to get interested in.

Once I find a company of interest I usually add it to this site’s Watch List. At some point I will come back to it and dig deeper into finances and their story. It may be the next day or weeks down the road. Right now energy companies are hot and anything to do with home construction is not. I have some of both on the Watch List to get back to as market conditions change. When I review deeper I may keep a stock on the list, remove it because I do not find a compelling reason to keep monitoring it, or move it to one of the portfolios I track here. One thing I try to keep in mind is that prospects change for companies, sectors and markets and it is important to keep options open.