Why Diana Shipping Earnings Could Look Ugly

Diana Shipping (DSX 1.03%) will release its quarterly report on Tuesday, and investors have waited patiently for the long-suffering shipping industry to start to bounce back from its years-long struggles with a sluggish global economy. Yet Diana Shipping earnings turned negative last quarter, and it looks like the company could keep losing money for a long time to come.

Diana Shipping is far from the only company to feel the pinch of terrible conditions in the shipping industry, as companies built too many vessels during the expansionary period of the mid-2000s and have been paying the price ever since. The big question for Diana is whether it can outlast its competitors until shipping volumes pick up again in the next cyclical upturn. 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 could Diana Shipping earnings post a profit again?
Analysts have actually gotten a tiny bit less pessimistic about prospects for Diana Shipping earnings recently, narrowing their June-quarter loss estimates by a penny per share and expecting smaller losses for the full year as well. The stock has responded favorably to that enthusiasm, climbing 13% since late April and hitting levels it hadn't seen since mid-2011.

The conditions that led to the shipping industry's woes are simple to understand and unfortunately haven't changed very much. Along with rival DryShips (DRYS) and other carriers, Diana ordered new vessels during the boom years of 2006 and 2007, when the Baltic Dry Index soared to levels above 10,000. Yet by the time they actually took delivery of those vessels, shippers faced much different conditions, with the Baltic Dry Index having plunged 90%, crushing profitability and making shipping downright uneconomical in many cases.

One advantage Diana has, though, is a relatively clean balance sheet. That has allowed the company to modernize its fleet, seeking more fuel-efficient vessels that give it a better chance to earn profits even in poor industry conditions. By contrast, DryShips has limited financial flexibility to consider major capital improvements, leaving it in a less competitive position. Similar levels of high debt have held back Eagle Bulk Shipping (EGLE) and Genco Shipping (GNK 1.51%) and have forced weaker companies like Excel Maritime and STX Pan Ocean to seek bankruptcy protection recently.

The big question for the industry is whether recent rises in dry-bulk rates could signal a long-term turnaround. Since the beginning of June, the Baltic Dry Index has climbed from 800 to about 1100, and bullish investors hope that those gains can continue to pick up steam. If so, Diana is arguably in prime condition to take advantage because of its financial resources.

In the Diana Shipping earnings report, watch for the company to discuss its long-term strategy for waiting out the business cycle and looking for ways to profit when prospects climb again. As long as global economy eventually recovers, Diana could be in a great position to make the most of new opportunities when they arise. For now, though, those days still look far away.

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