Danaos Corp (DAC)

To understand why DAC is a solid long-term buy at today's prices, you have to understand why they are this low in the first place:

- DAC has chartered a huge # of new vessel construction. They will expand their fleet by about 50% in the coming 3 years
- To finance all this construction, they must take on a mountain of debt. Currently they owe about $1b and have to take on about $2b more
- This is the worst time in a long time to attempt to borrow money. The credit markets are very tight. As of now, DAC only has certain funding for about $500m of that $2b. That means they need another $500m by the beginning of '10 and another $1b by the beginning of '11 to meet their commitments. That's a steep hill to climb.
- To make things worse, shipping rates are currently in the toilet.... all this construction made a lot of sense when rates were 4-8x higher than they are today.
- Now that shipping rates are ridiculously low, that means the value of vessels are similarly low.
- Low vessel value means DAC is in breach of most of its loan covenants. That means they have to pay higher interest rates to get waivers from their lenders.
- Also because of their covenant breaches & tight lending they had to cut their dividends. That made all the dividend investors bail out.
- Furthermore, those higher interest rates are biting into their profitability

Look grim, right? Which is why the stock is at such a low p/e ratio. Now let's look at the upside:

- Either demand for shipping will increase, or competitors will go out of business. Either way, rates must go up. In fact, CONTEX rates finally flattened out over the last 2 months, and last week was the first real increase in over a year. This is the end of the trough for shipping rates.
- As rates stay stable & rise, the value of vessels will rise. This will eventually put DAC but within its covenants & lower its interest charges
- In the meantime, all these new boats are already chartered on long-term charters, with large solid counterparties. So DACs income will steadily rise despite its higher interest costs.
- DAC doesn't need the money to complete its build program for months/years down the road. So even though waiting to make the loan commitments makes the future look uncertain, it also means they can probably negotiate better rates as the credit markets loosen up in the coming months/years.
- Also the cancelled dividends are giving them $100m/year in free cash flow to apply against construction. Although only 10% of what they need, it helps a lot.
- It's not a matter of "can" they borrow the money, but for "how much" ... DAC is flowing so much cash they can afford the higher rates to guarantee they get the loans.
- Once the money to complete the build program is secured, the dividend can be re-instated. The dividend investors will come back to the stock.

So ultimately, an investor today has to be patient for 3 things to happen:
1) shipping rates to return to sustainable levels
2) capex funding to be secured
3) dividend to be re-instated.

This will take approx. 2 more years, but expect significant gains in the stock price as each of these 3 events occurs.