Horizon Lines (HRZ)

As the company further settles into its post private-equity-come-IPO phase, its operations and financials should normalize, allowing its free-cash flow generating capability to come to the forefront. Despite its earnings warning on 11/19/2007, the company reiterated its expectation to generate at least $120M in FCF next year. Further, the company asserts that number is a sustainable base to grow its business going forward.

The company's balance sheet is misleading as its vessels are held at cost (last check -- $139M). Using a replacement cost of $150M per vessel and amortizing the fleet's current average age, the hidden value of its fleet is probably closer to $850M.

The company's process re-engineering initiative, EDGE, is progressing on target and projected to save $40M annually when completed.

The company has leased 5 ships as part of its TP1 program. These ships will cover the Guam-to-Asia route covered by the Maersk agreement, freeing up the Jones Act vessels to stay on their US protected routes. Management expects this arrangement to add to EBITDA by 2009.^[1]

1. ↑ Horizon Lines Research - Possible Upside

All fuel costs are eventually passed on to customers via standard surcharges, with a lag of 30 to 60 days. Good customer base, with no customer comprising even 10% of business. Additionally, Horizon has been recognized by many of its customers (Walmart, Lowe's, etc) as an excellent service provider on a regular basis.^[1]

1. ↑ Horizon Lines Research - Possible Upside

Possible upside Jones Act provisions limit competition and eliminate foreign operators altogether, making these routes less volatile.

The company's close ties with the military (I suspect this is industry-wide), along with the growing trend towards protectionism, makes a repeal of the Jones Act unlikely even if Democrats take control of D.C.

As America's transport infrastructure comes under more strain combined with rising fuel costs, short-sea shipping may come under more attention and boost the possibility of amending the Harbor Maintenance Tax, opening up new revenue sources for Horizon.

Major CapEx for Jones Act vessel replacement not projected until at least 2012-2015. Container cargo ships are estimated to have a useful life of 45 years as opposed to 25 year tanker lives.^[1]

1. ↑ Horizon Lines Research - Possible Upside