Seaspan Corporation (ATCO) and Diana Shipping (DSX -8.36%) have gone in opposite directions this year. Seaspan has lost more than 35% of its value while Diana Shipping's stock has surged nearly 40%. That divergent performance makes sense in the context of their financial results. In Diana Shipping's case, revenue is up 31% while its net loss shrank significantly. Seaspan's revenue, on the other hand, has declined 7% while normalized earnings per share are down 45%.
That said, it's worth noting that Seaspan has continued making money despite the weakness in the shipping sector. And its profitability could rise sharply in the coming year given the recent additions to its fleet and its visible upside potential from higher lease rates. While Diana Shipping has similar upside, if not more, its visibility is nowhere near as clear as Seaspan's.
The bull case for Seaspan Corporation
One of the reasons Seaspan remained profitable this year, even though it was a challenging one for the container-shipping industry, is that it currently leases the bulk of its vessels to shipping companies under long-term charter agreements. Those contracts provided it with a predictable revenue stream and kept its profits afloat. There's plenty more where that came from: The company currently has a $4.7 billion revenue backlog on contracts that have an average remaining length of five years.
While the company does have some exposure to shipping rates, that headwind is quickly turning into a tailwind for the company. Seaspan noted last quarter that it gets about 10% of its revenue from smaller vessels under short-term contracts. However, those agreements are well below current rates. Likewise, the company has several long-term contracts expiring over the next year, which if leased today, would fetch 50% to 100% more. So the company should have significant near-term upside to shipping rates as it secures new leases for these ships.
In addition, Seaspan Corporation has added five new vessels to the fleet over the past year, all of which it signed to long-term contracts. It also has five more vessels on the way. These new additions to its fleet should provide some incremental revenue. Add that with the upside from repricing leases, and Seaspan's financial results should continue recovering over the next year, which could finally reverse the stock's slide.
The bull case for Diana Shipping
Diana Shipping's business model is quite different from Seaspan's. Not only does it own a different type of ship (dry bulk vessels versus container ships), but it typically leases all its vessels under short-term charters. As a result, it doesn't have the revenue predictability that Seaspan enjoys. That provides it with much more upside during the good times, though that greater potential reward comes with uncapped downside when industry conditions deteriorate.
At the moment, dry bulk shipping rates are on the upswing. The company's president, Anastasios Margaronis noted this on last quarter's conference call, stating that "the bulk carrier market conditions have shown clear signs of improvement this year compared to the historically depressed market environment seen in 2016." Because of that, CEO Simeon Palios pointed out that Diana Shipping "signed charter contracts for nine vessels, all of which were substantially higher charter rates than the previous contracts." Those conditions appear poised to continue, which leads the company to believe that earnings will rise.
That said, the president noted on the call that risks remain, including the potential for rivals to order too many new ships, which could cause rates to plunge. Further, while the global economy is strong at the moment, it can change on a dime, which could slow trade and weigh on rates. Given the short-term nature of Diana's charters, the shipper would feel the impact of those lower rates very quickly, which could cause its stock to sink.
Clearly visible upside
Shipping stocks are notoriously volatile because shipping rates seem to ebb and flow. That's why Seaspan focuses on owning ships it can sign to long-term contracts, which helps insulate it from this volatility. However, the company still has ample upside as expiring leases reprice and new vessels enter the fleet. That visible near-term catalyst should help reverse the slide in Seaspan's stock, which makes it the better buy over Diana Shipping.