One year after the perfect storm pelted the world's dry bulk fleet -- with an unimaginable decrease in demand paired with an extraordinary oversupply of ships -- the seas appear to have calmed.
While the next stage on the way to recovery may be that the best-positioned transporters perform quite well for shareholders, the number of clouds still looming portends a bleaker route for more impaired operators. Diana Shipping's (NYSE: DSX ) release of third-quarter results provides the perfect time to reassess the forecast from one year ago.
The sea state in a nutshell
China is carrying global industrial activity in the palm of its hands and providing a critical counterpoint to the persistent malaise in the U.S. and European industrial bases. In China, both industrial output and domestic retail sales rose by more than 16% in October, and China's transition from net exporter to net importer of coal has been anything but subtle. Miner Peabody Energy (NYSE: BTU ) reports that China imported 10 times the volume of metallurgical coal through August 2009 versus the corresponding 2008 period, while thermal coal imports increased fivefold. Pan-Asian steelmakers are leading the charge to restore full production.
The overall global outlook for commodities, as a result, has recovered part of its pre-collapse glory and shed a cloak of uncertainty. This resurgent demand is reflected in the 357% recovery in the Baltic Dry Index (an index of drybulk freight rates) over the past 12 months, including a roughly 60% improvement just since late September. However, the index is still down 25% from five years ago and 65% from just two years ago.
Patience is a virtue
Fools investing in the shipping sector will recall that last year's collapse coincided with the early stages of a massive build-out of dry bulk fleet capacity around the world. With Diana Shipping the poster child of conservatism and adaptation throughout this, this Fool continues to look to the company for insight into the investment climate for shipping stocks. Although the company did not repeat the same intensity of earlier warnings, Diana remains in a "wait and see" mode with respect to new vessels. The company suggested that some of the strength that we're seeing in the Baltic Dry Index could stem from widespread delays in delivery schedules, which is resulting in only about a 4% expansion in net fleets for 2009.
Once more is known about the anticipated oversupply over the next two years, Diana Shipping intends to parlay its pristine balance sheet into opportunistic growth by acquiring vessels "in a gradual and disciplined manner" at favorable prices. In the meantime, Diana took delivery of the Capesize carrier Houston this week with a profitable charter already booked, and awaits another behemoth due in February 2010. The fleet remains well deployed at 99.7% utilization, and net earnings of $0.36 per share for the third quarter beat analyst expectations despite a 53% decline from a year earlier. As we will see, Diana's result matches a sectorwide pattern of persistent profitability despite severely diminished earnings per share.
Sizing up the fleet
Let's steam through some dry bulk competitors.
- DryShips (Nasdaq: DRYS ) earned this Fool's recent nomination for the world's scariest stock despite an operational profile that has improved since the shipping storm first struck. With a breathtaking 97% decline in net earnings per share for the third quarter, and with a laundry list of risks, DryShips remains, at least in my opinion, structurally unfit as a legitimate investment.
- Excel Maritime Carriers (NYSE: EXM ) limited its third-quarter earnings decline to 70% on a per-share basis, but not without continuing to use an accounting crutch that accounted for 44% of Excel's reported revenue. Excel issued 6 million new shares to tackle some debt, but remains unattractively leveraged with debt greater than 2.5 times its market capitalization.
- Eagle Bulk Shipping (Nasdaq: EGLE ) topped the earnings-erosion pyramid with a 98% decline in net income per share in the third quarter; excluding special items, it was still an 88% drop. With outstanding debt of $837 million, and 22 vessels still on order, Eagle shares a similar risk profile to Excel, in this Fool's eyes.
- Genco Shipping & Trading's (NYSE: GNK ) earnings declined by only 45%, as the company's high spot-market exposure yielded gains from the increase in the Baltic Dry Index. If the BDI resurgence continues, Genco could continue to perform well with only 45% term charter coverage for 2010, but this also implies similar downside risk.
- Navios Maritime Holdings (NYSE: NM ) just announced a $400 million financing -- atop previous share offerings -- to fund a countercyclical growth spurt that has given this Fool pause. However, with 100% term charter coverage through 2010, and insurance against contract defaults, Navios appears to have removed some of the risk from what remains a bold gamble.
Your turn to pick
There you have it, Fools. From my long-standing top pick Diana Shipping, all the way down to DryShips, that's my ranking, given the complex factors facing the sector. At The Motley Fool, however, community intelligence is what really matters. Take part in the discussion today by voting for your pick in a poll and discussing your selection in the comments field below.