Although the increasing capacity of ships and slowing global growth are not good news for global shipping companies, some analysts believe this may be a good time to buy into the sector.

Zurich-based UBS AG has rated a number of shipping companies as “buys”; New York-based J.P. Morgan Securities Inc. suggests that a few in the sector be “overweighted” in a portfolio.

Carlee Price, research analyst with Franklin Resources Inc. in San Mateo, Calif., is also somewhat enthusiastic about the sector, pointing out that a number of shipping companies have both very high dividend yields and downside protection because much of their business is done under long-term contracts.

However, this is not an argument that appeals to Joe D’Angelo, portfolio manager with Signature Global Advisors, a unit of CI Investments Inc., in Toronto. He doesn’t like the sector’s prospects, in either the short or long term. In D’Angelo’s opinion, the sector is too cyclical for a long-term hold and he thinks there could be considerable downside for the shares in the short term, given the current economic environment and expanding capacity.

Richard McGrath, senior investment analyst and portfolio advi-sor with AGF International Investors Inc. in Dublin, is also not enthusiastic about the sector. He bought a couple of shipping stocks a few years ago but didn’t make any money on them because the companies didn’t behave rationally. They should have been disciplined, keeping freight rates up as capacity increased, but instead lowered rates in order to chase volume. As a result, it’s a sector he’d rather stay away from.

There are three subsectors in shipping: dry bulk, containers and oil tankers. And it’s only the last of the bunch whose prospects are good at the moment. Despite some cooling in global demand and drops in rates, both remain strong. In addition, oil tankers were the first to be built with additional capacity; that has now been absorbed.

Demand for bulk goods has slowed, but is still strong by historical standards; it is also expected to pick up when global growth strengthens. Nevertheless, McGrath says, the number of bulk vessels could increase by more than 60% in the next three to five years.

Container traffic has good long-term prospects because increasing amounts of consumer goods are transported using this method. But the U.S. economic weakness has lowered demand at a time at which new ships that were ordered in the past few years are being delivered.

Here’s a look at some of the shipping companies recommended by global money managers and analysts:

> A.P. Moller-Maersk As. Based in Denmark, this is the largest container-shipping company in the world and the third-largest global port operator. It also has oil tankers and bulk carriers; it’s involved in offshore oil and gas production; and it also has a 68% interest in Denmark-based retailer Dansk Supermarked Gruppen.

Charles Burbeck, head of global equities with HSBC Halbis Partners in London, says Moller-Maersk is a well-managed company without excessive debt. It has also been lucky enough to have significant oil exposure at a time when demand and prices are high. “The only real issue is what happens to shipping rates,” he says, “and that depends on how severe the global slowdown is.”

In a Sept. 1 report, London-based UBS Ltd. had a “buy” rating on the stock, with a 12-month price target of 66,000 Danish kroner ($13,424), well above the DKr45,400 ($9,745) at which the 1.9 million outstanding ordinary shares closed on Sept. 30.

The company’s charitable foundation, A.P. Moller og Hustru Chastine Mc-Kinney Mollers Fond til almene Formaal, owns 41.1% of the shares and controls 50.4% of the votes.

Net income in the six months ended June 30 was DKr11.6 billion ($2.4 billion), up from DKr8.3 billion during the same period in 2007. Revenue was DKr148.4 billion vs DKr131.2 billion. Cash flow after the change in non-cash working balances was DKr22.6 billion vs DKr17.4 billion. Debt was DKr82.4 billion as of June 30.

Established in 1904, the firm’s main business is container shipping. The operation of these vessels and the container terminals that Moller-Maersk owns generated DKr75.8 billion in revenue in the six months ended June 30.

Container vessels and terminals contributed only DKr1.3 billion to net profit. It’s worth noting that the terminals brought in 70% of these earnings even though their share of revenue amounted to only 10%.

@page_break@Oil and gas production and related activities — including tankers, offshore supply vessels and offshore drilling — accounted for 30.7%. of revenue and a significant 75.5% of net profit. Earnings from the production side were up by 93.6% from a year earlier vs a drop of 23.6% on the shipping end.

Subsidiary Maersk Oil and Gas AS owns 39% of Dansk Undergrunds Consortium and is also its operating partner. DUC, which produces 80% of the oil and gas from Denmark’s waters in the North Sea, is a joint venture with Shell Oil & Gas Extraction Denmark BV, which owns 46% of the project, and Chevron Phillippines Inc., which owns 15%.

Maersk O&G also has oil production in Qatar, Britain, Algeria and Kazakhstan and has exploration licences in the North Sea, North Africa, West Africa, the Middle East, Central Asia, South America and the Gulf of Mexico.

Besides producing and transporting oil, Maersk O&G provides support for supply vessels and offshore drilling activities. It also offers salvage and towage.

Retail activities accounted for 18% of revenue for Moller-Maersk and 6.1% of net profit. Dansk Supermarked operates supermarkets and hypermarkets (large self-serve markets on the edges of towns). These are mainly in Denmark but the Netto stores have expanded into several European countries.

Other activities — including shipbuilding, industrial plastics production, container manufacturing, air courier services and a 20% interest in Danske Bank — accounted for 2.6% of revenue and 8.7% of net profit.

> Mitsui O.S.K. Lines Ltd. Burbeck considers this Japan-based company’s stock to be pretty cheap, but warns that its performance depends on global conditions in the next 18 months. Mitsui could have growth in earnings per share of 10% and a return on equity of 30% in fiscal 2009, ending March 31. But if shipping rates fall dramatically, EPS could be flat.

Burbeck likes Japan’s approach to shipbuilding and shipping, noting that the country has been committed to this area for a long time: “They think in terms of decades.”

He also notes that a lot of this business is done on contract, which lowers volatility.

In Burbeck’s opinion, Mitsui is more defensive than most shipping companies because it tends to lease its vessels out on contract rather than operating them itself. That means that earnings are likely to get a boost as contracts expire and new ones are put in place incorporating higher rates.

However, in an Aug. 7 report, UBS Securities Japan Ltd. downgraded its recommendation on the stock to “neutral” from “buy” based on “the growing uncertainty” in the container market.

The UBS Japan report notes that its 12-month target price of ¥1,350 ($13) is based on the stock trading at a premium. But Mitsui’s 1.2 million outstanding ordinary shares closed much lower, at ¥884 on Sept. 30. Japan Trustee Services Bank Ltd. owns 10.5% of these shares.

Mitsui has less dependence on container traffic than its peers, but container ships still account for 130 vessels, or 15% of its fleet as of March 31. UBS Japan notes that the outlook for Mitsui’s container shipping is considerably more optimistic than other companies. The division had a loss of ¥2.2 billion in the three months ended June 30.

On the other hand, Mitsui is assuming lower rates for dry bulk than UBS Japan is forecasting. Mitsui is the largest global player in the dry bulk subsector with 364 ships, which — along with 60 liquefied natural gas carriers, 166 tankers and 103 car carriers —brought in 52.6% of revenue and 96.4% of operating income in the three months ended June 30.

UBS Japan notes that Mitsui is the biggest global player in liquified natural gas; Mitsui says it is currently involved in about 25% of the world’s liquified natural gas transportation.

The rest of Mitsui’s revenue comes from logistics services (3.2%), ferry, cruise and domestic transport of people and goods (combining for 2.6%), and associated businesses (6.9%). The last category has developed because of the company’s marine shipping expertise and includes closely related activities such as tugboats, cruise ships, chartering, ship management, travel services, trading services, temporary staffing and offshore engineering.

The company has also diversified into real estate services and financial services.

Net income was ¥55.3 billion ($535 million) in the three months ended June 30, up from ¥33.9 billion during the same period a year earlier. Revenue was ¥507.5 billion vs ¥445.9 billion. Operating income after the change in non-cash working balances was ¥6.9 billion. Long-term debt was ¥437.5 billion as of June 30.

> Pacific Basin Shipping Ltd. Established in 1987, this Hong Kong-based company is a dry bulk shipper that is expanding into other areas to diversify its earnings base. Says UBS Securities Asia Ltd. in a June 24 report: “We believe vessel sales and equity placements are clear signals of the move to reduce dry bulk shipping exposure and position the company for growth in other sectors.”

UBS Asia has a “buy” rating on Pacific Basin’s stock in a Sept. 3 report, with a 12-month target price of HK$14 ($1.91). Pacific Basin’s 1.6 million outstanding ordinary shares closed at HK$6.95 (95¢) on Sept. 30.

Net income was US$337.6 million in the six months ended June 30 vs US$162.9 million a year earlier. Revenue was US$909.9 million vs US$455.4 million. Cash flow after the change in non-cash working balances was US$284.2 million vs US$97 million. Long-term debt was US$591.6 million as of June 30.

Pacific Basin’s dry bulk fleet, including ships on order, numbers 113 ships of varying size with an average age of 6.6 years, vs the industry average of 18.1 years. Of these, 29 are owned, 63 are on long-term charters and 21 are on short-term charters. These ships carry a wide range of products including metals, coal, grains, sugar, fertilizers, forest products, steel, cement and alumina.

Pacific Basin’s report for the six months ended June 30 states: “We have so far witnessed few signs of a slowdown in demand for dry bulk shipping services.”

Pacific Basin also has a 50% interest in Fujairah Bulk Shipping Ltd., which is based in the United Arab Emirates.

Pacific Basin has entered the “roll on, roll off” sector, with orders for four vessels to be delivered in 2010. These ships are used for wheeled cargo, an area the company believes has good demand prospects.

Pacific Basin is involved in port development and operations in China, Asia Pacific, the Middle East and Canada. It also has a towage business, principally in Australia, and a joint venture with Fujairah Bulk Shipping for supplying rock and aggregates to the Middle East.

> Star Bulk Carriers Corp. Based in Athens, this dry bulk shipping company began operations in the fourth quarter of 2007 following the completion of the redomiciliation merger in which Star Maritime Acquisition Corp. was merged into Star Bulk.

Star Bulk’s 12 vessels have already generated US$100.9 million in revenue in the six months ended June 30, with net income of $US48.3 million and operating cash flow after the change in non-cash working balances of US$47.6 billion. Long-term debt was US$183 million as of June 30.

Franklin Resources’ Price thinks Star Bulk could be an opportunity, as the company has contracts covering 79% of the goods it ships and has US$250 million on hand that it can spend on additional capacity.

Star Bulk also pays a dividend of 35¢ a share per quarter, which works out to a yield of 20% on the US$7 at which the 55.3 million outstanding shares closed on Sept. 30. Star Bulk’s officers and directors own 18.7% of the shares.

The share price is down considerably from the US$15 at which trading opened on Dec. 3, 2007.

Price believes the dividends can be sustained; even if dividends continue to be paid for only two to 2.5 years, inves-tors will do well. She considers the company to be “fairly well managed.” IE