Is There Any Containing Diana Containerships?

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Most of the investment theses behind Diana Containerships (NASDAQ: DCIX  ) seem to hinge on its juicy dividend that currently yields 17%, but with the vessel glut and falling charter rates making the industry look like a shipwreck, will investors jumping in now just find themselves in Davy Jones' locker? Five Wall Street analysts cover the container ship operator, and all of them believe it will outperform the broad market indexes, so let's look at why they think Diana Containerships might be able to ride out the storm.

Hiding in plain sight
Fortunately for Diana, it operates in the more favorable spot market than in the medium- and long-term charter categories, like its former parent Diana Shipping that it was spun off from several years ago. Spot market rates tend to be higher than time charter rates because it's hit or miss whether the vessels will be hired out -- which also makes the niche riskier -- but that hasn't stopped rates from falling.

Last quarter, the container ship operator reported higher revenues and higher profits than in the year-ago period, but only because it took deliveries of several new ships. Time-charter equivalent rates fell more than 16% in the third quarter, and they're down almost 8% for the nine-month period, suggesting the rate of decline is accelerating. At the same time, its expenses were rising, up 10.5% in the quarter and 17% year to date, which could present problems down the road.

Even in the better-performing oil tanker market, operating in the spot rate market is no guarantee of success. Just ask Frontline, which nearly sank as its very large crude carriers, or VLCCs, lost 60% of their value in the spot and period market from one period to the next, while its Suezmax rates were down 35% period to period.

Between Scylla and Charybdis
In fact, all vessel sizes across all industries are seeing their rates sucked down. The Baltic Dry Index, which is a composite of the rates realized by Capesize, Supramax, Handymax, and Panamax dry bulk shippers, is heading lower again after having started 2013 on a high note. While rates are about 15% above where they were a year ago, the downturn is a worrisome development in the near term.

Diana Containships, with its a fleet of Panamax ships -- the largest vessels that traverse the Panama Canal -- is not immune, either.

According to analysts at Alphaliner, an industry consultant, container ship capacity is expanding at a rate just as fast as those in dry bulk shipping and oil transport. They estimate capacity will grow 9% this year while demand will only widen somewhere between 3% and 6%, suggesting the 16% average rate hikes shippers are seeking might not be so easy to achieve.

The gains Diana Containerships has made over the past six months has boosted it to the top ranks of valuation among its peers, but considering the short-term squalls ahead as well as a dicey global economic picture it needs to circumnavigate, investing in the container ship specialist presents a riskier proposition now than it was last summer. 

If TCE rates continue sinking and demand doesn't pick up even more, we're likely to see Diana flounder on the shoals of outsized expectations of recovery. Industry watchers aren't holding out much hope for Europe or the Mediterranean trade routes, the latter of which they anticipate may see volumes fall by as much as 10%. I'd hold off on casting my lot with shippers just yet -- regardless of their dividend yields -- since chasing yield can be a risky endeavor all its own. But let me know in the comments box below if you think the shipper can make it safely back to port.

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Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 06, 2013, at 10:03 AM, robmxa wrote:

    I wanted to buy home builders year before last year but didn't have the cash. Would have made 500%.. My decision was based on the fact that the preponderance of analyst said it was too early.

    Based on your advice and others I am now buying shipping. It is nice to get a second chance.

  • Report this Comment On February 06, 2013, at 10:11 AM, imacg5 wrote:

    DCIX has all it's ships on time charter, not spot.

  • Report this Comment On February 06, 2013, at 3:03 PM, josephpporter wrote:

    DCIX's fundamentals show it to be a well-run company whose managers are bright enough to avoid significant debt, and maintain a fleet size appropriate to the market. A downturn might hurt them somewhat, but a lot less than other carriers.

  • Report this Comment On February 06, 2013, at 4:15 PM, imacg5 wrote:

    Well Joseph, you appeared to be the smartest guy on the SA discussion, so I'll reprint my comment from there to here.

    By the way I have owned DSX on and off since 2006, and I consider them to be the best management.

    But, this is the deal with these "sale and leaseback" arrangement. Not illegal, or even sleazy, but as long as you realize what you get for valuation down the road.

    The value of the Garnet in Nov 2012 was not $30 million. Charter free.

    And the going charter rate for a 1995 Panamax 4,700 TEU ship, for three years, was not $27,000 a day.

    That's the way a purchase-leaseback works.

    The same week that the Garnett was purchased. A newer, 2003, bigger, 5,900 TEU, Japanese built, Post Panamax was bought for $25 million

  • Report this Comment On March 27, 2013, at 7:55 PM, josephpporter wrote:

    What a difference a month-and-a-half makes. Their last purchase really trashed their free cash/share. That free cash was what I thought would make their dividend sustainable, but without it they are a dividend cut waiting to happen. As luck would have it, I lost all my shares to a stop during their last plunge. I may not re-invest.

  • Report this Comment On March 29, 2013, at 8:15 AM, 4manicow wrote:

    Have patience as I try to catch up. Since DCIX bought the Hanjin Malta, and they expect that ship to generate almost 10M/year over the next 3 years, can we breathe a sigh of relief and think the dividend is sustainable?

  • Report this Comment On May 27, 2013, at 6:51 PM, kankemike wrote:

    Ex-date on 5/31/13 @ $.30

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