Why Diana Still Refuses to Pounce

From the mighty lioness to your neighborhood calico cat, felines exhibit considerable prowess as expert hunters. While qualities like speed, agility, and intelligence all play their role, it's that uncanny knack for waiting in stillness for the perfect moment to pounce that I find most impressive.

For epitomizing the application of those skills within the corporate world, I continue to view Diana Shipping (NYSE: DSX  ) as the unequivocal queen of the dry-bulk kingdom. Effectively absorbing a deep collapse in spot charter rates, Diana's long-term charters actually scored a 1.9% year-over-year increase in its average freight rate to realize a $31,602 time-charter equivalent. Meanwhile, Diana's larger fleet drove sales higher by 24% to $74 million, and dropped anchor onto an 18% earnings increase with $32.3 million. In an industry wracked by painfully thin margins at spot-hire rates, Diana's 44% net profit margin is truly a thing of beauty.

As we watch the dry-bulk industry appear to come apart at the seams amid a rather epic crisis of oversupply, one can just imagine the temptation for a well-capitalized operator to pounce onto apparent bargain vessel valuations and bulk up one's operations in anticipation of an eventual bottoming-out of these treacherous business conditions.

But Diana Shipping remained nearly still, opting instead to dabble in containerships while awaiting that perfect moment. Meanwhile, Eagle Bulk Shipping (Nasdaq: EGLE  ) pressed forward with an aggressive fleet expansion, Navios Maritime Holdings (NYSE: NM  ) took on some leverage to finance its own eyebrow-raising growth spurt, and Genco Shipping and Trading (NYSE: GNK  ) created a spinoff called Baltic Trading (NYSE: BALT  ) to purchase vessels and operate them in the spot market. The infamous DryShips (Nasdaq: DRYS  ) , of course, continued to dance to the beat of its own drum.

Sure, Diana took delivery of some fresh new Capesize vessels, expanded her fleet by 25% to 25 vessels, and placed orders for two massive, highly specialized Newcastlemax carriers, but these moves will pale in comparison to the massive fleet expansion that Diana will ultimately undergo once the shipper finally pounces upon a perceived bottom in this ruthless business cycle. Between the company's $345 million cash position, available credit, and the potential to tap the China Ex-Im Bank for additional financing, I believe the company's available war chest for opportunistic vessel purchases may be approaching $1 billion.

The latest industry estimates for looming expansion of the global fleet hardly offer comfort. Only 34% of scheduled newbuilding vessel deliveries were cancelled during 2010, and a similar slippage rate is anticipated for 2011. That would yield a 12.9% expansion of the global fleet during 2011, plus an 11.5% addition in 2012, outpacing growth in bulk shipping demand in both years. If these estimates hold, look for sustained weakness in freight rates to drive highly leveraged operators toward the brink, and spawn the kind of deeply distressed asset sales that Diana Shipping has been waiting to pounce on.

Fool contributor Christopher Barker can hold his breath underwater while a Capesize carrier steams overhead, though he doesn't recommend it for humans without gills. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Baltic Trading, Diana Shipping, and DryShips. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has an unsinkable disclosure policy.


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