A 'Ben Graham value' in shipping

"Overseas Shipholding is aggressively adding vessels to its fleet either by acquisition or new construction. Older vessels are being sold to build significant cash ($20 per share) to pay for new vessels and to pay down debt.

"The shipping industry is currently flooded with new and old vessels, but the overcapacity will change when all single-hull tankers are phased out by the end of 2010.

"OSG is undervalued at 1.7 times current EPS, although this is misleading because the P/E becomes 10.4 when based on forward next 12-month earnings. OSG shares are clearly oversold based upon the company's huge cash position and explosive earning power.

"The company's earnings per share increased 26% during the first quarter of 2009 with most of the gain from the sale of older vessels. Fewer vessel sales in the next few quarters will cause EPS to decline sharply.

"Shipping rates declined by 50% from a year ago for tankers, caused by slower worldwide demand and an increased supply of ships. We expect an 80% drop in EPS during the next 12-month period followed by a rapid rebound in future years.

"The balance sheet is very strong with a whopping $20 per share cash balance. The dividend is secure and provides an attractive 5.7% yield. OSG shares will likely climb to our 'minimum sell price' of $75.41 within two to three years."

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