Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Ponder Diana Shipping's Best Case Scenario

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The dry bulk shipping industry continues to make waves. The Baltic Dry Index has again ebbed mercilessly in recent weeks, and virtually all of the U.S.-traded stocks in the group have underperformed the S&P 500 year-to-date. Shares of both Diana Shipping and DryShips (Nasdaq: DRYS  ) , in fact, are still languishing in negative territory for 2010.

The slipping degree of interest in the industry's stocks among investors is palpable, right at the moment when Diana Shipping's (NYSE: DSX  ) outlook is noticeably shifting from dire warnings into resurgent optimism.

Diana has reason to be optimistic, even in this incredibly difficult business environment for the industry. The seagoing hauler beat estimates for both revenue and earnings, turning in a cozy profit of $33.8 million for the third quarter. Diana's incredible net profit margin of 47% for the quarter floated atop a modest 2.4% slip in the fleet's average daily charter rate. Competitor Genco Shipping & Trading (NYSE: GNK  ) , by contrast, saw its time-charter equivalent (TCE) fall by a more precipitous 12.8%.

Like the mining sector that the company serves, Diana Shipping is keenly focused upon the long-term outlook for growth in commodity demand from places like India and China. For 2011, Diana expects a global increase of about 8% in volumes of iron ore shipped, while the outlook for coking coal is far stronger still. Following a 23% surge in 2010, coking coal shipments may expand a further 14% in 2011. Thermal coal volumes will increase as well in 2011, though likely at a more modest 4% clip.

Looking over the horizon to the longer-term outlook, equipment manufacturers Caterpillar (NYSE: CAT  ) and Joy Global (Nasdaq: JOYG  ) have both signaled their clear expectations for sustained commodity demand growth. Joy Global has conveyed its bullish outlook explicitly, while Caterpillar echoed the case this week through its $8.6 billion takeover bid for Bucyrus (Nasdaq: BUCY  ) .

Thankfully for shipping investors, that demand growth will go a long way toward absorbing a massive influx of new dry bulk vessels presently on order. Whether that demand growth (and the port congestion related thereto) will be sufficient to absorb the increased supply will depend, ultimately, upon the final tally of that incoming supply.

According to Diana Shipping president Anastasios Margaronis, the crux of the issue comes down to slippage and scrapping. If too much of the present order book for new vessels is realized in actual deliveries, and scrapping activity is insufficient, a worst case scenario could see the dry bulk market "collapse under the weight of tonnage joining the fleet."

Fortunately, Diana Shipping considers a best case scenario more likely at this stage, where roughly half of the present orderbook fails to enter the global fleet, and scrapping activity increases to rates seen in 2009. Under those conditions, and assuming those demand predictions materialize, Margaronis believes "the market should comfortably absorb the new tonnage." He discussed multiple caveats to those scenarios, in a conference call that Fools invested in the dry bulk space are encouraged to review. In the final tally, though, I consider a scenario where Diana Shipping's stock reawakens into meaningful strength to be the most likely of all.

The Fool has established a bear put spread position on Caterpillar. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Diana Shipping. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy can hold its breath underwater while a cargo ship passes overhead.

Read/Post Comments (0) | Recommend This Article (15)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1371628, ~/Articles/ArticleHandler.aspx, 10/25/2016 6:43:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 9 hours ago Sponsored by:
DOW 18,223.03 77.32 0.43%
S&P 500 2,151.33 10.17 0.47%
NASD 5,309.83 52.43 1.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

7/8/2011 4:00 PM
BUCY.DL $92.00 Down +0.00 +0.00%
Bucyrus Internatio… CAPS Rating: *****
CAT $85.99 Down -0.34 -0.39%
Caterpillar CAPS Rating: ***
DRYS $0.36 Down -0.01 -1.74%
DryShips CAPS Rating: **
DSX $2.52 Up +0.01 +0.40%
Diana Shipping CAPS Rating: ****
GNK $5.65 Up +0.26 +4.82%
Genco Shipping and… CAPS Rating: **
JOY $27.90 Up +0.01 +0.04%
Joy Global CAPS Rating: ****