Drybulk shippers are a unique sort of company: They transport drybulk commodities like iron ore, coal, grain, and fertilizers. They operate and own massive fleets that typically include the smaller Panamax vessels and then the much larger and widely measured capesize vessels as well.
Drybulkers usually do well when the global economy is on the upswing; the more that trade and global demand increase, the more business these companies do. Fortunately for investors, there's an index that helps track the shipping costs that these businesses demand, and that's the Baltic Dry Index (BDI).
The Baltic Dry Index in 2011
The BDI had been increasing in the years before the financial collapse, as global demand, cheap financing, and massive trade caused drybulkers to borrow on the cheap and order new vessels. However, when the economic collapse occurred in 2008, demand dried up, and the BDI has been on the constant decline ever since.
Recently, the BDI dropped to its lowest point in almost two years. The main reason is that analysts have been alarmed at the massive glut of ships that have been and will continue to flood the drybulk market. Although demand is expected to increase in 2011, supply is expected to outstrip that demand, causing rates that shippers get to drastically decrease.
For instance, in 2009, about 115 capes emerged onto the global scene; in 2010 that number increased to 210, and this year there are at least 200 more expected for delivery. Accordingly, the going charter rate for capes plunged by about 50% on the spot market last week and hit $12,000 a day -- essentially the rate it costs to operate a ship in the first place. Just for context, prices were about $40,000 in November and around $20,000 in early January. This is obviously an enormous blow to the shippers, as they are forced to either sideline ships or sell old ones for scrap.
Making matters worse was the recent flooding in Queensland, Australia, an area that is the source of about half of the world's seaborne coking coal (used to make steel). The flood was the worst in about 50 years and is estimated to cost about $2.3 billion in coal sales.
How cheap have things gotten?
Owners have tried their best to stem the tide flowing out of their industry by either selling ships diversifying their businesses (getting into container ships or deepwater oil drilling). However, the markets have not been kind. Take a look at these seven stocks that have fallen dramatically over the past year and compare them to the broad market:
|
1-Year Price Change |
Forward P/E Ratio |
|
|---|---|---|
| S&P 500 | 17.5% | 13.5 |
|
Dryships |
(14.2%) | 5.0 |
|
Nordic American Tanker Shipping |
(19.3%) | 23.9 |
|
Diana Shipping |
(17.3%) | 7.8 |
|
Navios Maritime |
(17.7%) | 5.0 |
|
Eagle Bulk Shipping |
(9.9%) | 22.0 |
|
Excel Maritime Carriers |
(19.5%) | 11.9 |
|
Genco Shipping & Trading |
(40.5%) | 5.1 |
Source: Yahoo! Finance.
Some of these companies have definitely held up better than others, but it's clear that across the board, they've all taken beating compared with the S&P 500. Five out of those seven companies are trading below the broad market's P/E ratio and at first glance, look to be dirt cheap. The question is whether all the bad news has already been priced into these stocks, and my answer would tend to be a resounding "yes." Analysts have shunned most of these companies, and short interest as a percentage of float continues to rise; Genco Shipping, for instance, has a shocking short interest of 16%, while Dryships has a short interest of 9%.
The contrarian in me wants to say that now could be the bottom for drybulkers and that today could present a great opportunity to buy in at extraordinarily low prices.
What do you think: Are these drybulkers in for a rough 2011, or is a rebound in sight? Sound off in the comments section below or add these companies to My Watchlist to get the latest analysis and commentary.
