Horizon Lines posts big earnings

Defense Market Report
By James Smith
July 13, 2006

Since its initial public offering launched in late September 2005 at US$10.00 per share, Horizon Lines, with a market capitalisation of about US$550 million, has posted enviable earnings.

The company initially planned to offer 12.5 million shares at a range of US$15-17 per share but lowered the offer price. This has proven to be good news for initial investors.

The company is trading at US$16.44 per share – a return of over 64 per cent from the IPO price.

In mid-June, Horizon Lines shareholders sold 6.6 million shares, which included an over-allotment option, at US$14.00 per share. The company did not issue any primary shares in the offering or upon the exercise of the underwriters' option and did not receive any proceeds from the sale.

Horizon Lines is included in this column as a defense-related company as it derives substantial revenues from the US military. Horizon Lines is the renamed CSX Lines which descended from Sea-Land Service, a pioneer in the container shipping business.

While the carrier does not transport weapons for the US government, it does move non-military goods to places where there is a significant military presence. The company may also benefit from revenue derived from the Military Traffic Management Command (MTMC), the US Army's component of the US Transportation Command. MTMC is the executive agent for the Department of Defense surface passenger and personal property programme - a programme with expenditures estimated at over US$3 billion each year.

The Charlotte-based carrier accounts for 37 per cent of total US marine container shipments from the continental US to the three non-contiguous Jones Act markets including Alaska, Hawaii, Puerto Rico and Guam. Horizon Lines is the largest US-flag carrier and the largest Jones Act carrier.

The Jones Act, struck in 1920, and related statutes require that vessels used to transport cargo and passengers between US ports be owned by US citizens, built in US shipyards, and manned by US citizen crews. These statutes, known as cabotage laws, are the foundation of the US domestic maritime industry.

Jones Act carriers move a billion or more tons of cargo annually.

Horizon Lines is poised to post annual double-digit earnings growth through 2010. An enlarged fleet is expected to increase earnings by US$12 million in 2008, US$18 million in 2009 and between US$25 and US$30 million in 2010.

In addition to growing its business due to rising demand, Horizon Lines plans to reduce its debt ratio from a current 78 per cent of capitalization to someplace in the mid-60s over the next two years before acquiring peripheral businesses, such as freight forwarders and logistics providers, to beef up its supply chain services to customers.

The company has already moved into the logistics business, handling all of grocery chain Safeway’s shipments between the mainland US and Alaska, and 75 per cent of Wal-Mart Stores container shipments to Alaska, Puerto Rico and Hawaii.

Everything at this company seems to be shipshape.

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