3 Shipping Stocks Set to Sail in the Right Direction

The global economy becomes more closely knit each year. The economic expansion of quickly developing countries requires resources to fuel the fire, and lots of them. The most efficient way to transport mass quantities of raw materials is through dry bulk shipping using large vessels. Assuming that teleportation devices won't be introduced anytime soon, the bulk shipping industry is here for the long haul.

Shipping services are all fairly standard: The materials are loaded, shipped, and unloaded. Therefore it is difficult for a company to differentiate itself based on quality of service, so other avenues such as rate competitiveness and cost efficiency become big factors in a company's success. A great example of a company doing just this is DryShips (NASDAQ: DRYS  ) .

The good
Through what has been a difficult period for shipping stocks, DryShips has done a great job growing revenues. Over the past two years, revenues have been growing year over year at relatively high rates and have hit $319.7 million, a 29% increase over the same quarter last year. The fact that DryShips can maintain revenues during an imbalanced period of supply and demand gives the company a promising outlook.

DRYS Revenue Annual YoY Growth Chart

DRYS Revenue Annual YoY Growth data by YCharts

Furthermore, the shipping industry is cyclical, with the fall and winter seasons typically being busier. DryShips has seen steadily increasing days in deferred revenues, indicating that it has plenty of business coming in even during the spring and summer seasons. This is a very healthy sign since many other shipping companies are struggling or shutting down entirely during off-peak seasons.

A smooth operator
Just as DryShips is able to generate revenues during off-peak seasons, it is important for a company to be able to maintain healthy operating margins throughout the year. Another shipping company doing a good keeping these margins open despite lower revenues is Diana Shipping (NYSE: DSX  ) . As seen in the chart above, revenues have been dwindling, but that does not mean management is not doing its part.

Although there is a steady downward trend, Diana Shipping is doing all that it can in the saturated market to keep operating margins positive while weathering the storm. The diminishing revenues are being combated with lower operating expenses as well, particularly during the off-peak seasons. The strategy now is to operate almost exclusively during peak seasons, which is different from the past where vessels were in constant operation to answer the high shipping demand.

DSX Operating Margin TTM Chart

DSX Operating Margin TTM data by YCharts

The current demand for shipping is being hurt by the slowing economies of China and India. With that in mind, Diana Shipping is focused on keeping costs low and exploring low-cost investments, such as acquiring new vessels. By adding to its fleet during an inexpensive time, Diana hopes to reward investors with extremely lucrative cash flows once the shipping business picks back up.

Shape up or ship out
The two companies above have done a relatively great job at staying proactive during a troubled time, and Eagle Bulk Shipping (NASDAQ: EGLE  ) is doing its best to follow suit. After putting up very strong earnings last quarter, reporting $72.2 million net revenue, compared with $52.6 million for the same quarter last year, Eagle looks to be on the right track.

Investors should also be aware of a drastic drop in Eagle's deferred revenues, which accompanied the increase in revenues last quarter as well. Deferred revenue is an indicator of how much work a company has to fulfill, and increasing numbers are usually healthy. The large drop in deferred revenue could indicate possible changes to revenue recognition and is a warning sign to keep an eye on.

Going up?
All of these stocks are at very low prices despite the fact that the market is at an all-time high. This is because the bulk shipping industry is seeing supply and demand factors that are severely out of order, which the industry is looking to correct in the near future. The Baltic Dry Index, a major indicator of the shipping industry, is currently just under 1,100, down from a high of 11,800 in May 2008. If demand follows current trends and picks up, these stocks could have a lot of room to run.

If you're afraid shipping stocks could sink further, then check out the company that The Motley Fool's chief investment officer has selected as his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (4) | 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 July 29, 2013, at 4:31 PM, imacg5 wrote:

    What in the world are you talking about?

    DRYS is a dry bulk and tanker holding company that also owns 59% of ORIG, a drilling company.

    Revenue and earnings from DRYS core business has been falling and is losing money. However, they have a consolidated earnings report, that includes the revenue of ORIG. But, DRYS does not have access to ORIGS revenues and earnings. So, DRYS is losing money, and the only thing that

    ORIG can do for them is for DRYS to sell some of the shares it owns of ORIG, in order to pay the bills.

    DRYS is horrible, and will be for years.

  • Report this Comment On July 29, 2013, at 4:39 PM, imacg5 wrote:

    EGLE is going to go bankrupt.

    One of it's banks, RBS is taking off all profits that EGLE makes above $20 million each quarter, it's part of the deal EGLE had to make because they couldn't pay their interest on their loans.

    The only reason that EGLE showed an increase in revenue, is not because business is getting better.

    The rise in revenue is because one of their majors customers, went bankrupt, and had to pay a settlement, for all the charters they defaulted on.

    The story on EGLE is that they owe the Banks $1.3 billion on their fleet of Supramax, and the fleet value is only worth $860 million.

    And the charters on their fleet are below the break even costs of running the ships.

    They lose money every day, so they made a deal with their banks to kick the debt payments down the road.

    Eventually the banks will get theirs, the management will get theirs, and the shareholders will get screwed.

  • Report this Comment On July 29, 2013, at 4:43 PM, imacg5 wrote:

    """The strategy now is to operate almost exclusively during peak seasons, which is different from the past where vessels were in constant operation to answer the high shipping demand.""""

    You've got to be kidding.

    Diana is not doing that.

    They've never done that.

    They lease their ships to someone for two years at a time, and the charterer uses it the entire year.

    Why do you make this stuff up?

  • Report this Comment On July 30, 2013, at 11:53 AM, clanza875 wrote:

    There is more the ORIG stake could do for DRYS other than just swelling the shares to meet loan payments

    Pledge as collateral

    ORIG could make a loan to DRYS

    ORIG could pay large dividends on common stock (not a coincidence they just took a new loan to pay their old loan as covenants didn't allow them to pay more than a certain percentage of profits in dividends)

    DRYS long term survival ultimately depends on the success of ORIG.

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9/26/2016 3:59 PM
DRYS $0.47 Down -0.01 -2.81%
DryShips CAPS Rating: **
DSX $2.79 Down -0.14 -4.78%
Diana Shipping CAPS Rating: ****
EGLE $7.40 Up +0.35 +4.96%
Eagle Bulk Shippin… CAPS Rating: *