This article is part of our Rising Star Portfolios series.
I've always been interested in shipping and in the historical maritime powers who built their wealth from their control of the sea lanes. Shipping is the lifeblood of the world's economy, moving goods from where they're made to where they're desired.
Thus, it's not surprising for me to look at the shipping industry, specifically dry bulk shipping, for my Rising Star portfolio. In my Messed-Up Expectations portfolio, I'm looking for situations where I believe the market has gone too far in its pessimism about what could happen with a company, driving the share price too low.
Right now, charter rates are low and will probably remain that way for some time, hurting the profitability of shipping companies. The question is, are there one or two outstanding companies lumped in with the rest, being unduly punished?
The industry
Dry bulk shipping involves moving the raw materials that run the world -- e.g. coal, grain, and metal ores -- from where they are produced to where they are needed. Various companies own vessels and contract with the producers to move these dry, bulky goods from Point A to Point B.
For this, they are paid a "day rate," a rental fee that customers pay for the use of the ship. The day rate dictates how much revenue the shipping company makes, while expenses related to the operation of the ship -- paying the crew, maintenance, and so on -- help determine the company's profitability.
Most shippers prefer to "rent out" their vessels under contracts, called "charters," where the day rate is settled ahead of time, rather than relying upon more uncertain open-market (or "spot") pricing. Charters typically last from a few months to several years.
The players
My first task was to look at various operating and capital structure metrics to see whether there were any companies that stood out. Here's an overview of six of them.
|
Diana Shipping |
Navios Maritime Partners |
Eagle Bulk Shipping |
Excel Maritime Carriers |
Genco Shipping & Trading |
DryShips |
|
|---|---|---|---|---|---|---|
| ROA | 5.4% | 5.8% | 1.6% | 0.7% | 4.0% | 3.5% |
| ROE | 11.2% | 13.7% | 0.6% | 5.7% | 7.6% | 6.2% |
| Margins: | ||||||
| Gross | 76.1% | 92.6% | 52.4% | 49.1% | 77.4% | 73.4% |
| Operating | 46.9% | 44.6% | 15.5% | 8.1% | 40.6% | 40.5% |
| Net | 45.5% | 38.4% | 1.3% | 23.6% | 21.0% | 23.0% |
| Capital Structure: | ||||||
| D/E | 30.2% | 59.6% | 174.1% | 62.9% | 130.9% | 72.4% |
| Debt/Capital | 23.2% | 37.3% | 63.5% | 38.6% | 56.7% | 42.0% |
| Net debt (millions) | ($26.1) | $288.9 | $1,116.9 | $1,040.3 | $1,502.3 | $2,727.2 |
| Interest coverage ratio | 25.6 | 9.8 | 1.0 | 1.1 | 2.2 | 5.2 |
Source: Capital IQ, a division of Standard & Poor's. Values are for the most recently reported trailing 12-month period (margins, interest coverage) or most recently reported quarter (D/E, debt-to-capital, net debt).
Of those six companies, only DryShips has moved into oil drilling in a big way. Because I already have an oil drilling company in the portfolio, I'll pass.
Of the others, Eagle, Excel, and Genco are skating pretty close to the edge in their ability to make their interest payments, which makes them too risky for me. Between Navios and Diana, the stronger balance sheet and net cash position tilt me toward looking further at Diana.
The problem
Day rates are much lower than in the heady days of early 2008. The Baltic Dry Index, a measure of dry bulk shipper day rates, fell from a high of nearly 11,800 in May 2008 to just 663 at the end of that year, a jaw-dropping 94% decline. It's currently just about 1,300. Things are not improving, either, as new charter rates Diana is obtaining for new charters so far this year are much lower.
|
Ship Name |
Old Rate |
Expiration |
New Rate |
Percentage Change |
Expiration |
|---|---|---|---|---|---|
| Thetis | $23,000 | February 2011 | $13,750 | (40.2%) | January 2012 |
| Melite | $24,250 | February 2011 | $16,500 | (32.0%) | January 2013 |
| Aliki | $45,000 | March 2011 | $26,500 | (41.1%) | February 2016 |
| Danae | $12,000 | April 2011 | $15,600 | 30.0% | March 2013 |
| Semirio | $31,000 | April 2011 | $17,350 | (44.0%) | March 2013 |
| Calipso | $23,000 | July 2011 | $13,750 | (40.0%) | September 2011 |
| Protefs | $59,000 | August 2011 | $11,750 | (80.1%) | July 2012 |
| Boston | $52,000 | September 2011 | $14,000 | (73.1%) | July 2013 |
| Average: | (40.1%) |
Sources: Company 20-F filings and press releases.
Diana has two more ships whose charters expire this year, not including Calipso, and has nine more ships (not including Thetis and Protefs) with 2012 expirations. All told, 14 of its 24-ship fleet will need to be rechartered in the next 18 months, probably at lower rates than currently. Lower day rates mean less revenue, which means less net income, and this doesn't even address the possibility of not being able to charter the vessels.
In addition, the entire industry is facing the delivery of many new ships over the next few years, from orders made when day rates were high and times were good. While Diana didn't go hog wild and order a bunch (it currently only has two new ships under construction), the expected increase in supply, as much as half again the current drybulk shipping capacity, is likely to hold day rates down for quite a while to come.
The decision
In the final analysis, even though Diana appears to be the best operator and in the best financial shape, the market probably has this one right. The revenue and supply problems are going to keep the entire sector limping along for the next several quarters at a minimum. I would look again if the expected shipping dilution didn't come to be or if some of its competitors go out of business. Right now, though, I'll pass.
After you've added Diana Shipping to MyScorecard, I challenge you to convince me that I'm wrong about this company at the MUE discussion board. I'm willing to have my mind changed.
This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).
