Summary
- Healthy petrochemical volume growth and responsible fleet management are leading to improved utilization and pricing for Kirby's core inland barge fleet.
- The energy-driven D&S business is in a cyclical weak period, as E&P and oil service companies stack fracking rigs and cannibalize them for parts.
- Kirby shares typically only look cheap when the Marine business is weak, but the outlook for Marine is quite healthy over the next two to three years.
Kirby (KEX) is a story of two businesses right now, one very much back to the historically strong operating performance, and the other struggling to find a bottom amid a significant decline in onshore oil and gas equipment spending. Fortunately for Kirby shareholders, it’s the Marine business -- the business that has always driven value for the company -- that is doing well, while management looks to minimize losses in the Distribution and Services business for the time being.
Valuation has often been a challenge with Kirby. The shares have underperformed the market since my last write-up, but I did note in that last piece that readers might want to try to buy shares below $75. That opportunity came about a month later, and investors who bought below $75 are holding a decent 20% gain over a roughly four to five-month holding period. While Kirby’s Marine business is definitely doing well again, and returns of capital to shareholder could be on the horizon, I still have trouble making the valuation work below $75.
The Cyclical Marine Business Has Come Back Strong
Kirby has seen improving results in its Marine business for several quarters now, but the third quarter results were the best the company had seen in almost four years. Inland barge utilization is back in the 90%’s, with double-digit growth in spot prices and healthy low-to-mid-single-digit price increases on new contracts (about 65% of the business comes from contracts of a year or more). With strong utilization and pricing, good cost control, and scale built through M&A, Kirby has seen its inland margins get back to 20%.
The coastal business has been healthier as well. Although utilization has remained lower (in the mid-80%’s), pricing has been recovering even more strongly than in the inland business. While the coastal is still a laggard in terms of profitability, the 9%-plus margin of the third quarter was the highest in years.
