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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Torpedoes in the water! Mutliple contacts!
Things are not looking good for the global shipping industry. Over in China, ore miner BHP Billiton (NYSE: BHP ) warns that the steelmaking industry is powering down. That means poorer sales for BHP, and fewer loads to haul for and struggling boaters such as Eagle Bulk, Excel Maritime (NYSE: EXM ) , DryShips (Nasdaq: DRYS ) , and Frontline (NYSE: FRO ) , all of which saw their shares decline yesterday on a raft of bad news.
In terms of ratings, Wells Fargo torpedoed Frontline's surging stock price, which it chalked up entirely to a "short squeeze" and argued has taken the share price "well beyond a sustainable level." Wells downgraded the stock to "underperform" (aka "sell"), and it's hard to disagree with that advice. Unprofitable and drowning in debt, Frontline is in bad shape -- but it's not the only shipper that's been hulled by low shipping rates. Eagle, Excel, DryShips -- each and every one of these companies is losing money. Each labors under debt levels far exceeding their own market caps. Of the four, only Excel is generating the kind of positive free cash flow necessary if they're to have any chance of getting their debt levels under control.
'Twixt Scylla and Charybdis
What's the solution to what ails this industry? The case of DHT Holdings (NYSE: DHT ) is illuminating. Like Frontline, DHT is primarily an oil hauler (Frontline also does some dry bulk work). Like Frontline, it's laden with debt and burning cash. The solution DHT has struck upon, and that Frontline and its larger peers may need to embark upon themselves, is to foist more shares upon an unsuspecting public.
Unable to fund itself from the cash its business generates, on Monday DHT offered to sell $80 million worth of new shares to existing shareholders in a bid to raise cash to pay down some of its debt. DryShips apparently liked the idea and had its Ocean Rig subsidiary file a $100 million "shelf registration" with the SEC soon after. I wouldn't be a bit surprised if others decide to follow suit.
If these share offerings are successful and attract the dollars needed to right this fleet of cash-leaky ships -- well and good. Anything's better than bankruptcy -- even stock dilution. But investors need to be aware that this salvation comes at a cost. Every share these companies issue is another nibble taken out of existing shareholders' stake in the company. The pie may or may not get bigger, but the shareholders' individual slices of it are definitely getting smaller.
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