How Do Shippers Look Now?

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.

The Dry Bulk Shipping tag in Motley Fool CAPS lists 17 companies. Join our online community today and share your views on this bellwether sector. CAPS is free and fun!

Fool contributor Christopher Barker has sailed through the Bermuda Triangle, but never encountered a sight as scary as DryShips. He can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Diana Shipping and Peabody Energy. The Motley Fool's disclosure policy can hold its breath underwater while a cargo ship passes overhead.


Read/Post Comments (12) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 12, 2009, at 3:39 PM, stocki711 wrote:

    Navios Maritime will be the long-run winner. They aquired 9 vessels during the crisis at loan rates never exceeding 7% (Goldman Sachs and GE borrowed at 10%+ rates). They have already reached agreements as to payments on all of these vessels. Large FCF and trading well below book. Even after a 10%+ runup to $5.70 ish they are the long term winner. I'll keep adding shares until they are trading around $8-9.

  • Report this Comment On November 12, 2009, at 3:55 PM, silverminer wrote:

    I had intended to include Navios as a choice in the poll.

    Sorry Navios fans, but please do cast your vote in the form of a comment. :)

    Fool on!

  • Report this Comment On November 12, 2009, at 4:25 PM, Fairhopeguy wrote:

    Navios is by Far the Best of Breed.

    They can borrow from actual banks, which speaks volumes. The South American Operation should fuel growth to the bottom line when the river's return to normal levels and no one can deny that the Charter insurance has been a goldmine for the rolling stomach of investor's. Add in that Ship's coming off charter will be put back into service at higher rates and throw in the management's ability to keep cost under control, including reducing interest payment's and this is a winner long term.

  • Report this Comment On November 12, 2009, at 5:23 PM, silverminer wrote:

    Say it isn't so! :) DRYS leading the vote with 40%?? Where are my risk-averse Fools?

  • Report this Comment On November 12, 2009, at 5:25 PM, silverminer wrote:

    Say it isn't so! :) DRYS leading the vote with 40%??

    Where are all my risk-averse Fools?

    C

  • Report this Comment On November 12, 2009, at 6:50 PM, imacg5 wrote:

    By virtue of their low debt and cash hoard that was achieved more through good management and not massive dilution, Diana is the Queen. They did sell 6,000 shares but that is reasonable and at a reasonable price. The true test will be what ships they buy, and at what price, but mostly the charters they sign for them.

    NM is next, they have made some good moves, the only drawback is the debt, it becomes an issue as ship values fall. Yes, the BDI and ship values are expected to drop again in 2010.

    I don't think it's fair to put EGLE in the same risk pool as EXM, Excel vastly overpaid for QMAR. While the 22 new Supras for EGLE, were less than $40 million each, not much more than they would cost today. And the charters on them are excellent.

    The Drillrig part of DRYS could be very lucrative, but seeing how George has treated shareholders so far, you never know how the Primelead Spinoff/IPO will be treated. The preferred shares could get the lions share. George owns the preferred. I wonder if the Fools voting for DRYS are aware of that, or that when DRYS was $130 there were 31 million shares outstanding, and now 257 million. And 60 million preferred.

  • Report this Comment On November 12, 2009, at 8:25 PM, silverminer wrote:

    Glad to see that reason has prevailed and DSX has pulled back into the lead. :P

  • Report this Comment On November 17, 2009, at 1:15 PM, rijoker wrote:

    NM and DSX would be my picks and I own both. I like NM just slightly a bit more then DSX, but both are good and should have good things to come!

  • Report this Comment On November 18, 2009, at 1:17 PM, kioruke wrote:

    PRGN paragon Shipping. Lsst time I checked its market cap was less than its assests which makes it a pretty good buy, they did just issue some new shares, but still a good stock I think, Its been putting up good EPS for some time.

  • Report this Comment On November 19, 2009, at 1:33 PM, Archvile wrote:

    ESEA

  • Report this Comment On November 19, 2009, at 2:27 PM, stan8331 wrote:

    DSX is the best, but it is fairly expensive. SBLK is my second favorite.

  • Report this Comment On November 24, 2009, at 10:11 PM, lansingFools wrote:

    SSW - Seaspan has got to rate up there with the best shipping companies. They have weathered the storm better most.

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