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.
The reason for the weakening BDI is threefold:
- As the global demand for commodities has slowed down, the shipping business has waned.
- 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.
- 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.
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.
52-Week Price Change
% Increase in Common Shares Outstanding
(YE 2007 to YE 2011)
Return on Assets
|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.
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.
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