Think of the worst day you've had in recent memory -- a day when everything went wrong and you couldn't buy yourself a break. That pretty much sums up the dry-bulk shipping sector over the past couple of years.
Prior to the recession, the Baltic Exchange Dry Bulk Index had skyrocketed above 11,500, signaling strong demand and high charter rates for shipping dry goods. Just months later, the BDI had collapsed below 1,000, and now it has dropped again to around that level. You've probably heard the terms "soft landing" and "hard landing" thrown around before. Well, the BDI was more of a "splat" -- and you can quote me on that!
The biggest problems affecting the shipping sector are weak global growth and, most importantly, overcapacity. Many shippers leveraged themselves to the brim when the BDI spiked and now find themselves sitting on short-term contracts for mere peanuts, compared to what they used to bring in.
Today, I suggest we take a look at two Greek shippers (that's right, I didn't think picking a truly dismal sector was enough, so I made sure to pick two Greek shippers to boot): DryShips (Nasdaq: DRYS ) and Navios Maritime (NYSE: NM ) . We'll see which one presents itself as the better buy right now.
Let's start with a side-by-side comparison of these shippers to get to know them better, and then we'll dive into their potential opportunities and pitfalls.
|Utilization Rate (MRQ)||99%||99%|
|Time Charter Equivalent||$22,257||$21,496|
Sources: Morningstar; Yahoo! Finance; company press releases. Yields are projected. MRQ = most recent quarter. N/M = not meaningful.
Right off the bat, we can already see some good and bad aspects of both shippers. Navios is profitable and offers a lofty dividend by most standards at 7.4%. DryShips, on the other hand, charters its dry bulk vessels at a higher daily rate after expenses (time charter equivalent) than Navios and boasts a marginally smaller amount of debt relative to equity.
But these figures only touch the surface. Let's look at why each company should be the buy, and then we'll make our decision.
Why DryShips is a compelling buy
One reason DryShips might be able to deal with exceptionally low dry-bulk rates is that 23 of its 36 ships are contracted for the long term. That still leaves 13 vessels exposed to short-term price fluctuations, but that's considerably better than other shippers in the industry. Genco Shipping & Trading (NYSE: GNK ) , for example, has had many of its long-term contracts expire, and it doesn't want to tie up new long-term contracts at today's low rates, so it's been utilizing a short-term charter strategy, which has severely hindered its near-term results.
DryShips' other "secret weapon" is its 65.2% ownership of drilling rig operator Ocean Rig UDW (Nasdaq: ORIG ) . While dry-bulk vessels are dealing with brutal overcapacity issues, there simply aren't enough drilling rigs to go around. Ocean Rig has sizable long-term contracts after 2012 to back up these claims and a $2.9 billion backlog to boot.
Why Navios Maritime is a compelling buy
Stop me if you've heard this one: It makes money! It may sound trivial, but Navios' "secret" weapon is that it continues to make money and reduce expenses, despite dealing with very depressed time charter equivalent rates.
Relative to DryShips, Navios also hasn't diluted shareholders to death with stock offerings and free cash outflows. Since 2008, DryShips hasn't drowned shareholders in secondary offerings, as outstanding shares have risen from just 45 million to 380 million in the latest quarter. In addition, between 2008 and 2011, DryShips had a disturbing cumulative free cash outflow in excess of $3 billion. Navios, on the other hand, has seen its share count rise by only 4% in that same time period, with an ugly but mostly manageable $1.5 billion cumulative free cash outflow.
And the better buy is...
Although I feel like I'm choosing between death by firing squad or lethal injection, I'm going to side with Navios Maritime as the better buy. DryShips does have its profitable Ocean Rig stake and a good portion of its fleet locked into long-term contracts, but Navios remains profitable, pays out a decent dividend, and is very close to being cash-flow positive once again. I also have to scratch my head in disbelief as to why DryShips would continue to reduce its stake in Ocean Rig when it's essentially the only strong growth prospect it has.
If, however, the words "Greek" and "shipping" cause an immediate knee-jerk reaction which forces your wallet back into the deepest reaches of your pockets, then perhaps our latest special report, which discusses three American companies set to dominate the emerging markets, will be right up your alley. Click here and this report can be yours.