There’s a major change brewing in the maritime shipping industry right now, and it should change the way you pick stocks in this once-hot sector. The new era of shipping demand is splitting one broad transportation industry into two distinct groups, with one of them poised to be a winner and the other poised to be a loser.

That was then, this is now
The 500%-plus gain Athens-based dry-bulk shipper DryShips (Nasdaq: DRYS) made during the first three quarters of 2007 is almost legendary. Even more fascinating with the move, however, is that the stock actually deserved to rally. Earnings grew from $2.38 per share a year earlier to $9.54 in 2007 — a 300% improvement — as dry-bulk and tanker-vessel operators could pretty much name any price they wanted; companies were willing to pay anything to keep the wheels of commerce spinning.

Now, however, tanker and dry-bulk shipping companies can’t even cover their daily boat operating costs with what the market is willing to pay to charter one of these vessels. That’s not to say there’s no opportunity in the shipping industry, though. Indeed, there is. It’s just not the same one from 2007.

Rather than led by materials demand, this economic revival has been led by demand for packaged items that go into the giant cargo container boxes (everything from clothing to computers to car parts) stacked by the hundreds on top of cargo platform boats built specifically for this purpose.

Cargo container shipments saw robust growth in 2010, even as freight rates rose as much as 50%. And, cargo container shipping volume is expected to grow at least another 8% in 2011; freight volume has already grown 8.5% in the first three months of 2011.

Dry-bulk and tanker vessels, on the flip side, are struggling to charge even half the rates they were able to just a year ago, and are now commanding less than one-fifth of 2008’s peak prices. Considering both trends are expected to persist, it may be time for investors to let go of dry bulk dreams and wade into cargo container reality.

Ways to play
There are two avenues to tap into this obscure but surprisingly fruitful aspect of the shipping industry.

The first one is the obvious one — buy shares in a cargo container shipper. That’s going to be a name like Costamere Inc. (NYSE: CMRE) or Seaspan Corp. (NYSE: SSW).

Though Seaspan saw income deteriorate in 2009 along with most of its peers, in 2010 it saw four consecutive year-over-year and quarter-over-quarter increases in net profit. Better still, 2010’s net income of $1.12 per share is expected to reach a record $1.53 this year. This translates into a forward-looking price-to-earnings (P/E) ratio of 11.4 and a growth rate of 36%; both are cheap for within and outside of the industry.

And yes, Seaspan can deliver on the growth promise. It’s got 58 ships in its current fleet, with eight more on the way within a year — a 14% expansion, every bit of which will likely boost the bottom line, considering its fleet utilization rate is a whopping 99.7%.

At the heart of this reliable operation is the way the company signs customers — by seeking out long-term charter contracts. In fact, the eight ships on the way are already spoken for through the year 2123. Such long-term deals may leave money on the table if freight rates skyrocket. Then, the company would be stuck accepting sub-market rates. By and large though, shipping companies that are willing to sign long-term contracts that tend to win — even if just by sheer survival — in the long run.

Or, just come along for the ride
The second way to make money in the newest era of maritime transportation is a little more indirect, but just as rewarding: by owning a stake in a company that rents out these container boxes. Look for CAI International Inc, (NYSE: CAP), SeaCube Container Leasing (NYSE: BOX), or a close cousin.

CAI International, much like Seaspan, can barely keep up with demand. The utilization rate for its 827,000, 20-foot (or equivalent) container boxes is hovering just under 100%, and that strong demand is showing up on the bottom line. Last quarter’s per-share profit of $0.57 was the most profitable quarter ever for the container rental company, as was the whole year’s per-share profit of $1.44.

Though 2011’s projected income of $2.06 per share represents a 43% growth rate, it may not do the company justice. CAI International has actually topped estimates in its three most recent quarters, while also topping estimates in 12 of the past 14 quarters.

Like Seaspan, the secret of CAI International’s consistent success may have a lot to do with the fact that it seeks out long-term contracts, which can limit the upside, but also limits the downside. The trade-off is worth it, as the company has managed to rekindle earnings growth, not by higher rental prices, but by higher rental volume. That’s how the stock’s trailing P/E of 16.8 can jive with the projected 9.9 P/E — the company is looking to add even more rental units in 2011 after increasing its total number by 48% last year.

Action to Take –> Considering both CAI International and Seaspan have a penchant for long-term contracts, each should be seen as a longer-term play. And yes, the two stocks overlap to some degree, but the cargo container evolution merits a slight overweight. CAI International likely has a 25% upside through 2011, while Seaspan’s is closer to 35% (Seaspan also pays a decent $0.125 quarterly dividend). Either has the potential for even greater returns than that, though.

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