It would be understandable for investors to approach the shipping industry with caution, especially after years of misery, but this time really might be different. Key industry metrics reported during first-quarter 2018 business updates, including the supply of available ships (at a multiyear low) and the number of ships on backlog (at a historic low), provide confidence that steadily rising rental rates aren't going to slide backward anytime soon.
That helps to explain why shares of Seaspan Corporation (ATCO) and Diana Shipping (DSX 0.35%) are up 36% and 28%, respectively, since the beginning of April. Both performances easily beat the 5% return of the S&P 500 in that span. However, even the healthy gains made recently don't come close to erasing the losses accumulated in recent years, as both shipping leaders are down over 34% in the last three-year period.
That could mean there's plenty more room to run. So, if investors could only own one of these shipping stocks, which would be the better buy?
Image source: Getty Images.
The matchup
Seaspan has been announcing operational updates left and right in recent months -- and they've been mostly positive. In the first quarter of 2018, the company grew revenue 12%, adjusted EBITDA 13%, and cash available for distribution 8.6% compared to the year-ago period. Higher daily charter rates for vessels of all sizes and higher utilization of its overall fleet were the driving forces behind the year-over-year improvement.
The containership leader also grew its cash balance to $333 million by the end of March, but that doesn't include a $250 million equity investment from Fairfax Financial that was announced at the end of May. The investor will provide another $250 million in the first month of 2019 to bring its total investment in Seaspan to $1 billion.
That's not all. Four new vessels were received in May and immediately entered into three-year contracts, which will provide a quick boost to earnings and cash flow. Plus, Seaspan acquired the remaining portion of its joint venture with Carlyle Group called Greater China Intermodal Investments (GCI). The move gives the containership leader control of 8% of the global fleet and, more important for investors, is expected to boost earnings 20%.
The infusion of cash, both from committed investors and cash flow generated from new business, should allow Seaspan to continue shoring up its financial position. That would be a welcome reprieve for investors that were stuck with a toxic balance sheet in the recent industry downturn.
Image source: Getty Images.
Greece-based Diana Shipping has also enjoyed a steady climb following the release of its first-quarter 2018 earnings, and for similar reasons. Higher charter rates and utilization of its bulk carrier fleet pushed revenue in the opening quarter of this year to $48.4 million, compared to $31.3 million in the year-ago period. The net loss attributed to shareholders came in at only $4.5 million, compared to $27.9 million in the opening quarter of last year.
Few companies maximized steadily rising charter rates in the first quarter quite like Diana Shipping. Out of a possible 4,445 days of operating time, its 50 vessels were only idle for nine days total, resulting in a utilization rate of 99.8%. Seaspan has a larger fleet, but boasted a first-quarter 2018 utilization rate of 96.8%.
The bulk cargo business should only continue to improve. Why? Diana Shipping has taken quite a few of its carriers with expiring charters and rented them out at significantly higher rates. For instance, in May the m/v Baltimorewas entered into a 12- to 14-month contract for $18,050 per day, compared to its previous charter of $11,300 per day. The company has announced similar deals for 15 vessels in 2018, or fully 30% of its fleet.
Image source: Getty Images.
By the numbers
Digging through the recent operational highlights only confirms what the high-level details seem to indicate: Shipping stocks are coming back with a vengeance. That doesn't really help answer our original question asking which stock is a better buy. Therefore, let's compare several head-to-head financial metrics for more guidance.
|
Metric |
Seaspan |
Diana Shipping |
|---|---|---|
|
Market cap |
$1.23 billion |
$534 million |
|
Dividend yield |
5.5% |
N/A |
|
Forward P/E |
7.9 |
11.2 |
|
Price to book |
0.59 |
0.79 |
|
Price to sales |
1.5 |
3.2 |
Data source: Finviz.
Well, that makes things remarkable easy.
The better buy is...
Often, listing valuation metrics for two stocks in the same industry will provide only subtle hints at which business might have an advantage. But in this matchup, the numbers clearly indicate that Seaspan is the better buy -- and it's not even close.
Seaspan pays a dividend, while Diana Shipping does not. Additionally, the larger company is expected to grow earnings faster, is priced at a lower premium to sales, and trades far below book value compared to its smaller peer. Of course, it's important for investors to tie the valuation metrics back to the real-world progress.
The numbers indicate that Seaspan is deriving an advantage from its massive size and reach, which is exactly what investors would expect in the shipping industry. While smaller peers such as Diana Shipping should also see their earnings and cash flow improve in the next several quarters, the larger business is better-positioned to capitalize on improving rates. Simply put, investors interested in one of these two shipping stocks should feel comfortable buying Seaspan.
