Here are some points from an interesting article, US Shipyards – Record Revenue At Firesale Valuations.
Yesterday Bollinger Shipyards, the largest privately-owned and operated shipbuilder in the United States, announced that it has agreed to purchase VT Halter Marine for the incredibly low price of $15 million. This is a shockingly low price for a yard with billions of dollars of government orders plus valuable facilities and real estate. Experts say the fire sale price may indicate that Halter’s contract to build the USCG’s new Heavy Icebreaker may be in serious trouble.
That Coast Guard icebreaker program has $746 million on order for one ship and options for two more at a total of $1.94 billion. If they make a standard 10% profit, then that’s almost $200 million. So why did the Singapore-based owner sell the US shipyard for just $15 million?
The contract is a mix of fixed price and incentive firm arrangements. The shipyard is taking a fair amount of risk should it encounter overruns. And those overruns seem likely, given the firesale price. The shipyard signed for the second icebreaker in January 2022, before the recent unpleasantness with inflation. Shipbuilding costs are probably already 10% higher than they were back in January.
Interestingly enough, the BLS producer’s price index for shipbuilding and repairing actually started to see dramatic price growth starting in September 2021. But of course, shipbuilding contracts take a long time to negotiate so it’s likely by the time this was apparent it was too late to add large adjustments to the price.
Perhaps the Singapore businessmen don’t realize that the US Government often makes its contractors whole regardless of performance issues or buy-ins — if they can stomach the prolonged process.
The article gives some interesting price comparisons, to show how uncompetitive US shipyards are despite their captive American customers:
Maersk recently ordered six of the world’s most advanced methanol-powered containerships in South Korea for $1.14 billion but those ships carry 17,000 TEU containers for a per TEU price of $11,176. The simpler ships Matson is building in Philadelphia will cost an eye-watering $92,592 per TEU.
The article suggests it isn’t just VT Halter Marine that received a low valuation. HII, the largest private shipbuilding in the US, has a contract pipeline over $60 billion and yet it’s Wall Street valuation is less than $10 billion. That’s less than one-quarter the price Elon Musk paid for Twitter! Here are the price-to-earnings ratios for a couple top DoD contractors that have little commercial business:
- HII: 15.6
- GD: 20.39
- NOC: 14.36
- LMT: 21.41
Despite losing over $1 trillion (!) in market cap, Amazon’s PE ratio is still 89.63. Absurd valuations for tech companies have been getting crushed, however, in the recent downturn since the Fed hiked rates. Google’s PE ratio is a measly 20.26 and let’s not even talk about Facebook. So those defense company valuations don’t seem crazy low in this environment, as if it were buying a shipyard at $15 million.
So, despite the unfavorable valuations, defense companies are pretty stable and potentially uncorrelated to the macroeconomy’s ups and downs.
The article’s author argues that aerospace companies are taking larger revenues and profits while shipyards are chronically underfunded and undercapitalized. And it has taken a toll on military logistics:
War on Ukraine has reiterated the importance of logistics in battle and most logistics are still moved by sea yet the majority of the United States Merchant Marine’s ready reserve fleet is not ready for war. The result of the test of sealift logistics in 2019 netted a 40.7% cumulative fleet success rate. This might be ok in a Middle East land war but in the vast expanse of the Pacific, ships matter most.
In a separate article, Capt. Robert Saunders (ret.) remarked that the US had 6,768 active ships in the fleet after WWII. Since the 1970s, 14 defense-related shipyards closed down and only one opened up. For today, he said:
“We also don’t need as many [ships], but if you lose one in a future war, it is like losing ten in World War II,” warned Sanders. “So it is important that we have the facilities to replace what we could lose.”
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