Bail Before This Ship Runs Aground

Not long ago, dry shipping stocks were all the rage. Global financial markets were strong, business was booming, and massive shipbuilding efforts were under way. But in the wake of the Great Recession, the tides have turned. Revenues have taken a nosedive, credit has dried up, and barnacles encroach on aging vessels. While one shipper in particular posts numbers as ominous as the Titanic, another has managed to sail through these stormy seas toward calmer waters.

Dry shipping 101
Dry shippers transport non-liquid freight such as coal, wheat, and rice -- just about anything that does not have to be refrigerated or moved quickly.

The Baltic Dry Index is a measure of the demand for shipping capacity versus the supply of vessels. An increase in demand pushes the BDI up. The BDI was as high as 11,000 before the collapse of the global financial markets. At present, the BDI is 928, down over 46% this year alone.

Industry challenges
The reason for the weakening BDI is threefold:

  1. As the global demand for commodities has slowed down, the shipping business has waned.
  2. Shippers ordered more vessels during the boom, but since shipbuilding doesn't happen overnight, the extra capacity is being delivered now -- a time when it's not really needed.
  3. Shippers order vessels with the expectation that they'll find financing later, but while they may still be able to find financing, it's likely to be more costly than it was a few years ago.

Big ships
Four dry shipping companies dominate the market. While all of their stock prices plummeted, Diana Shipping (NYSE: DSX  ) and Navios Maritime Holdings (NYSE: NM  ) haven't lost as much ground as the BDI. Things get interesting when we take a closer look at the financials.

Company

52-Week Price Change

Total Debt-to-Equity

% Increase in Common Shares Outstanding

(YE 2007 to YE 2011)

EV/EBITDA

Return on Assets

Diana Shipping (30.14%) 28.59 27.0% 3.73 4.33%
DryShips (Nasdaq: DRYS  ) (35.59%) 112.84 894.0% 9.64 2.37%
Genco Shipping (NYSE: GNK  ) (47.34%) 126.30 63.0%* 6.95 2.22%
Navios Maritime Holdings (27.85%) 126.29 9.0% 6.99 2.62%

Sources: Yahoo! Finance and companies' 2011 annual reports. *Includes a 7.5 million share offering made after Genco released its 2011 annual report.

A low enterprise value over EBITDA ratio (EV/EBITDA) indicates that a company might be undervalued. Diana is the most undervalued of the four competitors when evaluating solely on this metric, while DryShips is the most overvalued.

Return on assets shows how efficient management is at using its assets to generate earnings. Since dry shipping is a very capital-intensive business, ROA is a good metric to evaluate. DryShips, Genco, and Navios are equally efficient in managing business. Diana is almost twice as effective as these competitors.

Drop the anchor
The numbers above reveal one clear winner and one huge loser.

Diana has followed a conservative approach to growing its business. Diana did not expand as rapidly as the competition when credit was plentiful, but it has maintained an admirably low level of debt. It also maintains the youngest (and most inexpensive to maintain) fleet of the competitors listed.

On the other hand, major red flags ensue when evaluating DryShips. DryShips increased its number of outstanding common stock shares ninefold in four years, and it's not insiders buying those shares. The company is strapped for cash, struggling to paying down massive debt, and issuing boatloads of stock to keep afloat.

It should be mentioned that through its majority-owned subsidiary, Ocean Rig (Nasdaq: ORIG  ) , DryShips owns and manages deepwater drilling rigs. The drilling rigs segment generates over half of DryShips' revenue. Earlier this month, DryShips announced that it plans to dump 9 million shares of Ocean Rig, no doubt in an attempt to raise more cash.

If I owned DryShips, I'd quickly jump ship before this one runs aground. 

Foolish final thoughts
If you are looking to dive into the dry shipping industry and add one of these companies to your portfolio, evaluate Diana and Navios. I'd tread lightly with Genco and wouldn't even consider DryShips.

Dry shippers have amazing upside potential when the global economy turns around. Read about more investments that are well positioned for the recovery in a free report crafted by my Foolish cohorts called "3 ETFs Set to Soar During the Recovery."

Fool contributor Nicole Seghetti does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (10)

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  • Report this Comment On April 11, 2012, at 2:20 PM, Teacherman1 wrote:

    Among drybulk carriers, NM and DSX are best in class, and in container ships, DCIX is my choice.

    Of course, as with all stocks, you have to buy at the right price.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On April 11, 2012, at 3:24 PM, imacg5 wrote:

    While Diana is to be applauded for having more cash than debt, and for having management that has been refreshingly honest with shareholders about the dismal future of dry bulk, it is still too early to buy.

    DSX has several charters expiring this year that will result in falling revenue and earnings. The market is in for a big surprise if it is calling for a bottom in this sector. 2012 will be the worst year yet, as ship values fall another 20%. DSX has made a few purchases at seemingly good prices, but if it holds most of it's dry powder, it can buy some modern, fuel efficient ships at very cheap prices. Then, when rates rise in 2013-2014, Diana will be in great position as a growth company. But really, it is still too early to get in.

    And as for DRYS, the people who claim that Dryships is becoming more of a drilling company haven't been paying attention. DRYS owned 100% of ORIG a year ago, and now own 64%. At the same time it has used the proceeds to pay for more tankers and bulkers, that are worth less now than when they bought them, just months ago.

    That's not the direction the market wants.

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