Diana Shipping Looks for Smoother Sailing Ahead

On Wednesday, Diana Shipping (DSX 0.69%) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

The shipping industry has gone through huge economic imbalances in recent years, with a glut of vessels and weak levels of economic activity worldwide causing shipping rates to plunge. Diana Shipping has suffered its share of pain from the downturn, although it's in much better shape than many of its peers. Let's take an early look at what's been happening with Diana Shipping over the past quarter and what we're likely to see in its quarterly report.

Stats on Diana Shipping

Source: Yahoo! Finance.

When will Diana Shipping stem the tide of red ink?
In recent months, analysts have gotten less optimistic about Diana Shipping and its earnings prospects, widening their first-quarter loss estimates by $0.02 per share and seeing full-year 2013 consensus loss estimates get worse by $0.06 per share. Yet investors have held out hope for a recovery, sending shares up 17% since mid-February.

For years, dry-bulk shipping has proven to be a dangerous industry. But bottom-fishing investors have apparently decided that the time is now for hard-hit shipping stocks to rebound, as one analyst believes that shipping rates could triple over the next couple of years. Well-known personality Jim Cramer actually recommended Diana specifically, but stocks throughout the industry soared in late March on hopes that the worst for the shipping industry could finally be history.

Even if the industry recovers more broadly, Diana has a key advantage over its peers: its balance sheet is in extremely good condition, with just $13.5 million in net debt. By contrast, rivals DryShips (DRYS) and Navios Maritime Holdings (NYSE: NM) carry much more substantial levels of debt, and as a result, they have less flexibility to consider strategic moves to take advantage of the industry's weak conditions. DryShips' move earlier this year to divest itself of the obligation to take delivery on some new vessels illustrates the cash-flow pressures that companies in the industry face right now.

It's important, though, not to get too optimistic about shipping right now. Diana still faces competition not just from other specialty shipping companies but also from private fleets that many potential customers have set up to ship their own goods. Moreover, as long as overcapacity exists, the barriers to entry for new companies seeking to build up a shipping business on the cheap will remain low.

In Diana's report, look closely for discussion of whether the company plans to upgrade its fleet to newer high-efficiency vessels. High fuel costs make such moves smart from an operating-cost perspective, but with Diana losing money, it might not be willing to make big capital expenditures right now despite the potential long-term gain.

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