Low break-even rate
Navios Maritime Holdings’ (NM) low daily cash break-even rate allows the company to enjoy significant cash flow regardless of whether the market returns to historical norms.
Free cash flow
Based on the current market rate of $13,531 per day and using the 4,486 open plus index-linked charter days of the company’s fleet, we can predict that Navios will earn almost three times more than its $36.1 million in free cash flow. But, should the rate revert to historical averages—which are approximately $20,345 per day for the 20-year average and $28,216 per day for the ten-year average—the company could earn $66.7 million or $102 million in free cash flow for the respective periods.
Cash flow scenario
As of June 30, 2014, Navios net cash provided by operating activities stood at $40.5 million compared to $37.9 million as of June 30, 2013. Plus, net cash provided by financing activities increased to $132.2 million from $62.1 million in the same period a year ago, mainly due to preferred equity issuance. Meanwhile, the company’s net cash used in investing activities expanded to $132.2 million from $86.8 million due to the purchase of additional vessels.
Cash flow break-even rate
The cash flow break-even point is the point below which a firm will need either to obtain additional financing or liquidate some of its assets in order to meet its fixed costs. Cash flow is necessary to cover costs and prevent a firm from operating at a loss.
The break-even point may be relatively stable or it may fluctuate, depending on the company or industry. Companies with high break-even points tend to have large fluctuations in earnings from year to year.
For the second quarter, NM’s cash flow break-even rate stood at $5,478 per open day—significantly lower than the current blended market rate of about $13,000 per day. This rate has created a margin of safety on the company’s chartering activity and a significant earnings upside.
Following a few of its industry peers—such as Diana Shipping Inc. (DSX), DryShips Inc. (DRYS), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM)—Navios Holdings has a strong cash balance to invest in any persisting market opportunity. Also, the company sustains dividend payments to investors in order to attract shareholders.
Let’s see how NM is benefitting from its lower cost structure compared to the industry average in the next part of this series.