In the euphoria of the commodity boom, little is being discussed of the carriers for all the goodies that are being spread around the world. I’ve mentioned in the past my involvement on the long side of now acquired Quintana Maritime and my forays on the short Dryships (DRYS), but that’s been about it. Now - from the same sharp analysts at Dahlman Rose & Co. who got me into Quintana - comes a similarly if not more intriguing idea: Navios Maritime (NM).

NM is a drybulk shipper with a varied fleet of small and large ships and, as was the case with Quintana, much of its capacity is already booked through 2010. The kicker in this story is that NM has recently purchased nine new Capesize (the largest model) vessels for delivery in ’09 and ’10, two of which are already locked under long term contracts. Meanwhile, long term contract rates are again firming up, which should allow NM to book up the rest of the oncoming fleet. Bottom line, ’08 to ’09, revenues should increase more than 30%, and free cash flow should jump more than 50%.

But wait... there’s more! Many of the ships NM has contracted for were locked in at much lower than current prices; now the resale market for ships is fairly volatile, but at least for now these acquisitions look to have been good investments in and of themselves. This is not just important from the standpoint of not overpaying, but from a financing angle as well. In a tight credit environment being able to show a lot of equity in your assets can make life a whole lot easier. That aside, NM should not have too much trouble raising the additional $645 million it needs to finance the purchases given that it has $427 million of cash on hand and is only 20% levered.

Bottom line, whether one looks at it from an NAV standpoint or a Price/CashFlow measure, NM is way undervalued relative to its competition, and offers a somewhat lower risk profile to boot. And for those who wonder what well known economies of scale can do to a stock price, once they actually kick in, just look at the action in the price of Excel Maritime (EXM) right after it closed the Quintana purchase.

Now for the other side of the coin:
 

• I view this as a side door play to a commodity space which is going parabolic. If the commodities tank for whatever reason (drying up of speculation, problems in China, etc.) drybulk shippers will suffer, notwithstanding that they may appear cheap.
  
  
• All drybulk shippers require large amounts of debt to operate: if you subscribe to the “deflation” notion, lugging around lots of debt is not a good thing... in fact it’s a very bad thing.
  
  
• Maritime companies’ management at times have been less than... let’s just say it’s a rough and tumble world out there (witness DRYS's recent shell games between affiliated entities which magically landed some nice chunks of cash in the principals’ pockets). I don’t know of any similarly questionable behavior as it pertains to NM, but the environment is there.
  
  
• And lastly, the fundamentals of this investment group are complex and very volatile, and therefore need to be followed closely, lest one gets blindsided. I have the benefit of Dahlman’s daily research notes to keep me abreast; I am not sure if I’d be so sanguine about any company in this industry if I did not have a good set of eyes planted on this space.

Navios seems to me relatively undiscovered and a good value compared to the competition. Dahlman’s price target is $19, and in that range it would not even be expensive in the scheme of things. But like anything tied to the commodities boom, the rewards come with the risks of playing with some fairly sharp objects.