Alexander & Baldwin (ALEX)

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Alexander & Baldwin, Inc. (NYSE: ALEX) is the largest of three companies that ship between Hawaii and the U.S. mainland, and also has fingers in the agribusiness, logistics, and real estate honeypots. The fortunes of A&B's shipping arm, Matson Navigation Co., has been tied to the health of the Hawaiian economy, which has been faltering lately. Although the Jones Act bars foreign companies from shipping along Matson’s routes, new competition from Pasha Hawaii Transport Lines in 2005 cut prices by 10% and Matson’s market share by 20%.^[1] In an effort to expand its operations and gain from China’s strong economic growth and increasing demand for imported goods, Matson opened up a new international route to the country in 2006. Despite volume growth of over 57% in 2007 along that route, it still represents just 15% of the segment's overall traffic. ^[2] Even more, competition along the China route is much fiercer than competition along the Hawaii route, because the Jones Act does not apply. Combined with rising fuel costs, margins have been pressured from all sides. Its real estate segment, however, is thriving; although GDP growth in Hawaii has slowed due to stagnating tourism, median home prices have stayed up. Despite bringing in just 13% of the company’s overall revenues, A&B’s real estate subsidiary, A&B Properties, accounted for 32% of A&B’s operating profit in 2007. ^[3][4] Falling sugar yields and sugar prices has crushed A&B’s agribusiness segment, making land more profitable for real estate than for agriculture.

Business and Financials

Alexander and Baldwin has a market capitalization of $2.07B, and had revenues of $1.69 billion in 2007. In the first quarter of 2008, quarterly earnings were 70.40% higher than in the year before, and 51.90% higher than in 4Q07. These increases were fueled by growth in the company’s China shipping segment, high value housing sales, and a recovery in its sugar business. ^[5]

A&B operates four main segments:

• Ocean Freighting: Subsidiary Matson Navigation provides both domestic and international freighting services, and accounts for 56% of the company's revenue. Over 80% of the units shipped by Matson Navigation are moved between Long Beach, Oakland, Seattle, and the other large ports in Hawaii. ^[7] Westbound shipments of automobiles account for 32% of the segment's transportation volume. The volume of containerized freight and automobiles fell by 3% and 7%, respectively, in 2007. To combat stagnation in the domestic shipping market, Matson has created a route from the U.S. Pacific Coast, to Hawaii, then Guam, then across the Pacific to China, and finally back to the U.S. Pacific Coast. ^[8] While the volume of goods shipped to and from Hawaii fell by 3% in 2007, the volume to and from China rose 57% because of China's economic growth spurring increased demand for imported goods. Although the China route carries only 15% of Matson’s overall goods, it has contributed to the segments overall income growth of 20%. ^[9]
• Transportation Logistics: Rather than transporting goods, Matson Integrated Logistics purchases large quantities of discounted air, ocean, rail, and motor transportation services both domestically and internationally, and accounts for 24% of the company's revenues. In this way, customers with extensive shipping needs can avoid making small, expensive transportation arrangements with multiple companies. Integrated Logistics also provides shipment tracking, warehousing, and freight forwarding services. ^[10]
• Real Estate: Alexander & Baldwin and its subsidiaries, including A&B Properties, Inc. owned approximately 89,120 acres in Hawaii and 360 acres on the mainland U.S. by the end of 2007. This segment accounts for 13% of the company's revenues. About two-thirds of the land owned in Hawaii is used for agriculture and pasture, one-third is watershed and conservation land, and 0.65% is urban land used for a variety of purposes. Its mainland real estate is leased to building developers who rent out space for retail stores and office buildings; it is also developed by the company itself, and then sold for profit. ^[11] A&B’s leasing portfolio has performed at near record highs. For properties owned in Hawaii occupancy rates averaged 98% in 2007, and 97% for properties owned on the U.S. mainland.^[12] In the first quarter of 2008, real estate sales rose to a high of $187.4 million.^[13] Median real estate prices on the island of Oahu, Hawaii’s largest market, have been flat since 2006, after doubling between 2002 and 2005 ^[14] Because A&B only sells a small number of its holdings each quarter, changes in the real estate market as a whole are reflected much more in the value of the company’s real estate portfolio, than in the value of its real estate sales.
• Agribusiness: A&B grows cane sugar and coffee in Hawaii, and markets the produce under its own brands on the mainland U.S.^[15]This segment accounts for 7% of the company's revenues. It farms 59,265 acres, on which 164,500 tons of cane sugar and 2.5 million pounds of green coffee were produced in 2007. A&B produced approximately 80% of Hawaii’s sugar; sugar production accounts for over 45% of the segments revenue. After producing just $200,000 of net income in 2007, A&B’s agribusiness recovered and had a net income of $4.8 million in the first quarter of 2008. ^{[16] [17]}

Trends and Forces

Falling Sugar Prices And Production Yields Have Damaged the Profitability of A&B’s Agribusiness

From 2005 to 2007, the operating profit of the agribusiness segment fell by approximately 98%. The first cause, lower production yields, was a result of dry weather conditions lasting over two years. That, combined with lower sugar prices, accounts for over 94% of the decline in profit margins from 2006 to 2007. ^[19][20] U.S. raw sugar prices have fallen approximately 20% since 2006. As a result of NAFTA, starting in 2008 Mexico was allowed to export unlimited quantities of duty-free sugar to the U.S. Since then, sugar prices have fallen approximately 15%, and have shown no sign of stabilizing. ^[21]

Woah nelly, how about them appels!

The Economic Strength of Hawaii and the U.S. Mainland Significantly Impacts the Company’s Transportation and Real Estate Businesses

The Hawaiian economy is primarily driven by tourism and military spending. A slowing U.S. economy has already negatively impacted tourism; the number of people visiting Hawaii in 2008 has fallen to 2005 levels. ^[22] As a result, container shipping volume along the U.S./Hawaii route fell 3% in 2007. ^[23] A U.S. recession would further cripple Hawaii’s largest industry, tourism. The value of the dollar compared to the Chinese Yuan has also fallen by about 14% since 2006, lowering freight rates to China.^[24] However, volume growth of 57% along that route has more than made up for falling prices. ^[25]

Rising Fuel Costs Increase Transportation Expenses

From 2006 to 2007, the price of oil rose by over 66%, raising the company’s fuel expenses by $53.1 million.^[26] Through fuel surcharges, subsidiary Matson Navigation is able to recover some of the increases in its fuel expenses. However, there is a lag between price and surcharge increases, causing the company to lose some potential revenue anyways. Furthermore, competitive pressures limit the potential increase in surcharges.^[27] From 2006 to 2007, Matson was only able to raise fuel cost surcharges by $43.4 million, $9.7 million less than needed to prevent income loss. ^[28]

Competition

Agribusiness Competition

The smaller agribusiness component of A&B faces significant competition, but is able to sell approximately 80% of its coffee at a premium, above commodity market prices. ^[29] Subsidiary Kauai Coffee’s largest competitor is Kona Premium Coffee Company. Kauai Coffee competes primarily over taste and product variety.^[30] Subsidiary Hawaiian Commercial & Sugar Company (HC&S) produces over 60% of Hawaii’s white (not premium) sugar. Although HC&S faces competition from companies all over the globe, from Bunge’s growing operations in Brazil to Imperial Sugar Company in the U.S, tariffs and import quotas have drastically reduced the impact of competition. In 2005, sugar prices in the U.S. were three times the world markets’.^[31] That has been changing; however, in just the six months since Mexico has been allowed to export duty-free sugar to the U.S., prices have fallen over 15%. Nevertheless, the market remains heavily subsidized, keeping prices above a floor minimum of 18 cents per pound of raw cane sugar. As comparison, the price at the start of 2008 was 20 cents per pound. ^[32]

Real Estate Competition

Subsidiary A&B properties, has, through a 50 year process of mergers and acquisitions, become Hawaii’s fourth largest private landowner. The company’s size lets it expand quickly into high value real estate markets. Competition comes from Hawaii's other, large land owners, like the Bishop Estate.

Land Ownership in Hawaii in 2005^[33]

Domestic Ocean Transportation Competition

Within the domestic shipping market between the U.S. pacific coast and Hawaii, Matson competes on quality, breadth of service, price, and speed of delivery, as the number of shipments it makes is greater than all of its domestic competitors combined. ^[34] Until 2005, Matson’s only significant competitor was Horizon Lines. In 2005, however, Pasha Hawaii Transport Lines began to transport automobiles to Hawaii. Pasha competes with A&B primarily over price; after it announced its entrance to the U.S./Hawaii market, A&B cut automobile transportation fees by over 10% - but still lost 20% of its market share.^[35]

Source:^[36]

Competition Along International China Route

Strong growth in the U.S./China rout has buoyed the entire company, but competition along that route is fierce. Matson Navigation competes with carriers such as Maersk, COSCO, Evergreen, Hanjin, APL, China Shipping, Hyundai, NYK Line and Yang Ming. ^[37] Matson’s shipment time is faster than the route average, but it is still forced to compete over price. The company represents less than 15% of the route’s traffic in terms of the total size of cargo delivered.^[38][39][40]

Ocean Shipping Time for U.S./China Routes^[41]

References

1. ↑ Port Services & Technology News: New Competition In Hawaii
2. ↑ ALEX 2007 10-K, Item 7, Page 38
3. ↑ ALEX 2007 10-K, Item 6, Page 28
4. ↑ Bureau of Economic Analysis
5. ↑ Yahoo! Finance: Alexander and Baldwin
6. ↑ ALEX 2007 10-K, Item 6, Page 28
7. ↑ ALEX 2007 10-K, Item 7, Page 36
8. ↑ ALEX 2007 10-K, Item 1, Page 2
9. ↑ ALEX 2007 10-K, Item 7, Page 38
10. ↑ ALEX 2007 10-K, Item 1, Page 2
11. ↑ ALEX 2007 10-K, Item 1, Page 5
12. ↑ ALEX 2007 10-K, Item 7, Page 47
13. ↑ ALEX March 2008 10-Q, Page 2
14. ↑ Bank of Hawaii Economic Outlook For 2008
15. ↑ ALEX 2007 10-K, Item 1, Page 12
16. ↑ ALEX 2007 10-K, Item 6, Page 28
17. ↑ ALEX March 2008 10-Q, Page 2
18. ↑ ALEX 2007 10-K, Item 6, Page 28
19. ↑ ALEX 2007 10-K, Item 7, Page 41
20. ↑ ALEX 2007 10-K, Item 7, Page 42
21. ↑ ALEX 2007 10-K, Item 1, Page 12
22. ↑ Bank of Hawaii Economic Outlook For 2008
23. ↑ ALEX 2007 10-K, Item 7, Page 36
24. ↑ Yahoo! Finance Currency Converter: U.S. Dollar to Chinese Yuan
25. ↑ ALEX 2007 10-K, Item 1, Page 15
26. ↑ North American Oil and Gas News
27. ↑ ALEX 2007 10-K, Item 1A, Page 17
28. ↑ ALEX 2007 10-K, Item 7, Page 38
29. ↑ ALEX 2007 10-K, Item 1, Page 12
30. ↑ Kauai Coffee FAQ
31. ↑ Wall Street Journal: Sugar Socialism
32. ↑ ALEX 2007 10-K, Item 1, Page 13
33. ↑ Hawaii Data Book
34. ↑ ALEX 2007 10-K, Item 1, Page 2
35. ↑ Port Services & Technology News: New Competition in Hawaii
36. ↑ Seafarers International Union News: Horizon Lines Charters New Vessels
37. ↑ ALEX 2007 10-K, Item 1, Page 3
38. ↑ Matson’s China – Long Beach Express Brochure
39. ↑ China Focus: Freight Transport
40. ↑ ALEX 2007 10-K, Item 7, Page 36
41. ↑ Matson Navigation China Express Overview