Feb 6, 2025 Investment Case Analysis: Danaos Corporation (DAC) – Attractive at Its Current Price with 177% Upside Potential

Executive Summary

Danaos Corporation (DAC) is a global leader in container ship leasing, operating a fleet of 71 vessels with a focus on long-term charters. The company has demonstrated robust financial recovery since 2021, driven by strategic deleveraging, improving charter rates, and operational efficiency. 

Key highlights:

• Revenue Growth: 10-year CAGR of 6%, accelerating to 19% from 2021–2023.
• Margin Expansion: Gross profit margin improved from 52% (2014) to 66% (TTM 2024).
• Debt Reduction: Total debt reduced by 77% since 2014, with a debt-to-equity ratio of 0.2x (2024).
• Strong Cash Flow: Operating cash flow of $599M (TTM 2024), with a projected 12% FCF CAGR through 2034.
• Valuation Upside: DCF analysis suggests a fair value of  213/share vs. current price of 77 (177% upside).

Financial Performance Analysis

1. Income Statement Trends

• Revenue: Grew from 552M (2014) to 996M  (TTM 2024), supported by a $3.3B charter backlog.
• Net Income: Turned consistently positive post-2020, reaching $577M in 2023 (19% 10-year CAGR).
• Margins:
  • Gross margin: 66% (2024 vs. 52% in 2014).
  • Operating margin: 54% (2024 vs. 35% in 2014).
  • Net margin: 57% (2024 vs. -29% in 2014).

2. Balance Sheet Strength

• Total Assets: 4.25B(2024),up from 3.85B in 2014.
• Debt Management: Total debt reduced to 679M in 2024 from 679M in 2024 and from 3.02B in 2014. 
• Rapid reduction of outstanding shares from 23.8M in 2020 to 19.5M in 2024.

Liquidity metrics improved:

• • Current ratio: 3.93x in 2024 vs. 0.31x in 2014.
  • Quick ratio: 3.78x in 2024 vs. 0.28x in 2014.
• Equity Growth: Shareholders’ equity rose to 3.39B in 2024 from688M in 2014.

3. Cash Flow & Reinvestment

• Operating Cash Flow: $599M (TTM 2024), up 212% since 2014.
• Free Cash Flow: Negative in TTM 2024 due to 719M in capex, but management notes indicate 445M positive FCF for TTM 2024.
• Reinvestment: 30% of revenue allocated to growth and maintenance capex, aligning with industry standards.
• Share repurchases: retired ~4.3 million shares (18%) as part of a broader capital return strategy, alongside dividends ($3.4/share annualized)

Forecasts & Valuation

1. Key Assumptions

• Revenue Growth: 12% CAGR (2024–2034), driven by $3.3B charter backlog and fleet expansion.
• Net Income Growth: 12% CAGR, reflecting margin stability.
• Debt Growth: 2% CAGR (conservative estimate despite historical deleveraging).
• FCF Growth: 12% CAGR, supported by disciplined capex.

2. Discounted Cash Flow (DCF) Analysis

Metric                                         Value

WACC                                          8%

Terminal Growth Rate      3%

PV of FCF (2024–2034)  $1.60B

PV of Terminal Value      $2.37B

Equity Value                           $4.16B

Shares Outstanding         19.5M

Fair Value/Share                 $213

Upside: 177% from current $77/share.

Risks & Mitigations

1. Industry Cyclicality: Shipping rates are volatile. Mitigated by long-term charters (85% of revenue locked until 2028).
2. Legal Liabilities: Pending litigation from 2024 engine-room fire ($2.4M provision in 2023). Contingency plans include insurance coverage.
3. Capex Intensity: High reinvestment needs (719M TTM 2024). Mitigated by strong cash of 480M and access to debt markets.
4. Regulatory Risks: IMO 2030 emissions targets may require fleet upgrades. DAC’s modern fleet (avg. age: 10 years) reduces compliance costs.
5. Deferred tax liabilities started at $200M+ some 4 years ago has decreased significantly to $2.39M in the last 2 years due to changes in tax laws and write offs as a result of disposal of assets such as M/V Stride was deemed a total loss because of fire incident in Houston and sold for demolition in April 2024.

Conclusion & Recommendation

Danaos Corporation presents a compelling investment case due to its:

Resilient Revenue Model: Backed by long-term charters and a $3.3B backlog.

Strong Balance Sheet:  Minimal debt, high liquidity, Share buybacks, high dividend yield ( 4.27%) and improving ROE (17.6% in 2024).

Undervaluation: DCF implies 177% upside, with a margin of safety of 64%.

Recommendation: Buy with a price target of $213 in 3-5 Years.

Prepared by:  Moods Investment Research Team

 Disclaimer: This report is for informational purposes only. Conduct independent due diligence before investing.