After a long slide down from over $7.50 last July to just under $5 this March, value is now easy to see in this strong container ship company. After rereading the last reports from Diana Containerships, Inc. (DCIX), listening to its conference call and comparing management and company performance against the stock's performance, it becomes clear that there is a unique opportunity available for growth bulls who like cash flow. Diana is a dynamic, unique container ship company that harnesses its management's industry prowess to secure container ships at attractive prices to sell time charters against; this is the company's primary source of income.
The stock was hit badly over the past 12-months due to concerns over expiring time-charters and depressed charter rates estimated for 2013. On March 13th, 2013 TheStreet.com downgraded the stock to a sell. There was actually a positive reaction to this event, it created a solid line of support for the stock. One day following the downgrade, the stock formed a 52-week low at $4.94; today the stock closed at $5.75, a 16.3% increase in a little more than two months. The still depressed stock reported earnings this morning for the first quarter. It was expected to announce its large dividend and delivered, previously announced at $0.30 a share or nearly 21% annualized yield was backed up by another $0.30 dividend payable 6/12/2013 to owners of record 6/4/2013. As investors seek yield in a low interest rate environment Diana Containerships, Inc. simply stands out. Investors are seeking yield because the other mediums by which yield has been attained have become expensive and risky. Bonds for instance, have become risky and income generated is nearly completely eaten up by inflation with rates as low as they are.
The move from security to yield is clear. The market pushes continually through new highs with S&P 500 (SPY) and the Dow Jones Industrial Average (DIA) ETFs each at all-time highs. The iShares Barclay's 20+ year bond fund ETF (TLT) continues its downward trend even as Fed continues bond purchases. This would indicate that the Fed is increasingly becoming the only buyer of bonds, a major risk if and when the Fed decides to stop buying to stimulate the economy. As the chart below indicates, investors are abandoning the "security" of bonds ahead of a potential Fed exit from stimulus. Additionally, the prices of other seemingly secure assets such as precious metals ETFs like Gold (GLD) and Silver (SLV) again descend to near 52-week lows. Meanwhile high dividend yielding stocks within the Vanguard High Dividend Yield ETF (VYM) have outperformed even the booming S&P 500
The rotation from the security of bonds and precious metals to growth and income has foolishly passed over DCIX; the company succeeds based on its reputation and its exceptional reliability (fleet utilization). For dividend investors, it is imperative that operating income remains dependably high enough to count on future dividends. Since 2010, Diana has increased its quarterly dividend three times out of the 8 quarters it has issued dividends. It has been since September of 2012 when investors saw a payout increase but are most likely satisfied with the current model. Diana Containership's commitment to a consistent dividend yield and substantial offload of cash to investors should have yield seekers looking for reasons not to invest with them.
The weakness TheStreet.com cited was low net income growth and poor stock performance as well as unchartered time in 2013. When analyzing a stock, the metrics have to be relevant. Net income is important of course, but what is easily overlooked are metrics like operating days as a percentage of available days, in other words, how reliable is this company. Moreover, net income growth does not look bad but after offerings in 2011 and 2012, shares were diluted and EPS suffered. Diana is investing into itself; the company doubled its ship count in 2012 and took on nearly double the time charter revenue as the previous year despite unfavorable pressure on charter rates. The team has sold 2 of the five expiring charters and rechartered another with a short 7-12 month charter without losing operating days in an attempt to find customers. Listed below is the disparity between more relevant income and growth factors specific to this company and its industry that tell a better story than simply an EPS analysis:
Time charter revenue
These yield producing containerships are segmented by twenty-foot equivalent units or TEUs, which represents the size of each container (20'L, 8.5'H, 8'W). Various sizes of containerships create economies of scale. Diana's fleet centers on the most all-purpose size, known as Panamax. The company specializes in acquiring the best value vessels, buying and selling vessels as well as selling charters against their vessels. This model depends on management to capitalize on opportunities and maintain customer relationships in rough seas.
Strategically, Diana Containerships, Inc. management announced today that they are in the process of realigning their fleet. Consistent with TheStreet.com and other concerned investors, management was most concerned about expiring charters and also the future of their segment. It was announced today that three of five Panamax vessels with 2013 expiring charters have sold and proceeds are to be combined with other working capital to reinvest into larger ships as that trend is playing out in the industry.
The earnings expectation is widespread, and skewed to the downside, after continuing to grow in nearly all key performance indicators analysts seem to be mostly concerned about the current low charter rates and the upcoming expirations of 5 charters for DCIX. The fact is that management for this company specializes in finding opportunities and mitigating risks. Furthermore, if rates are unfavorable, a short charter which the company typically seeks is the likelier bearish scenario. Net income and rate growth are really not at issue for this stock. The focus item will be whether deals will get struck or not and how strategically positioned the company is for upcoming global growth increases, less so, the actual agreed rate in the interim.
This company depends on its relationships with its very small customer base, as noted in its fleet utilization improvement over the past three years, these relationships are strong. Limiting idle time and expenses has been a clear goal for management. The company is able to flow from acquisition to utilization seamlessly because of the experienced leaders at Diana. Taken with exaggerated low earnings expectations, the real challenges for the Panamax industry specifically become opportunities for Diana Containerships, Inc.
Part of the incentive management has to maintain its large dividend is because of the investments senior staff hold in the company, there is a large portion of paid-in capital. Even if they desire to keep the dividend high, the dividend yield is nearly 21%, how can the company possibly support such an expensive form of funding? Management continues to buy its stock and believes the price will increase; the yield will fall to normal constraints of what is considered a high-yield investment once any price increase occurs, but until then, DCIX should look juicy to a dividend hunter.
In 2008 with global economic growth in question, transportation investments sank during and after the recession and simply did not recover due to low charter rates and low demand aside from an uptick in 2011. Now, a more concerning risk would oversupply as the global economic environment has improved more containerships have entered the market. Diana has been protected from this risk largely. Within its niche of mid-sized containerships the company fills a need for its customers: mid-sized vessels are capable of traversing nearly all trade-routes. While the trend in newly built and on-order boats is skewed heavily toward much larger ships, this management team has navigated away from its competition and oversupply risks effectively through increasing its stake in nearly the opposite segment, used and mid-sized. These mid-sized but necessary container ship size known as Panamax are historically the most widely utilized ship and this management team is best suited to turn second-hand ships around and create value. While management announced new guidance in their ship size segment with intentions of acquiring larger vessels, Panamax remains an important hedge against an oversupply of larger vessels. The charter rates are uncertain but as U.S. and China lead subtle growth, Diana should benefit directly from increased shipping demand.
While low, the 2.63 return on equity is more powerful than first glance allows. The quality of this management is unique and venerable, able to sustain an enormous dividend while navigating public offerings and major asset purchases. The global growth picture is unclear but this is precisely the time to invest for capital appreciation. Remember the widely accepted theory that the higher orders and inventory building associated with growth drives the transport sector up ahead of an overall market rally, which would mean a position in Diana would benefit from global growth before it is seen in other sectors. Combined with global growth timing, this experienced management team can help DCIX to outperform.
Key takeaways from the earnings call this morning:
- Net loss of $31.8M, includes $32.6M loss from sale of three vessels.
- Management addressed aging and less relevant fleet by selling three Panamax vessels that had expiring time charters in 2013
- DCIX secured loan agreement for $50M, plans equity offering for $40M over next 12-months
- Earnings surprise, the expectations were very wide for today's report, aside from loss on aforementioned sale, earnings were $0.03 per diluted share
The money raised through the loan and equity offering and the proceeds from the sale of the three vessels will strengthen the financial position of Diana Containerships, Inc. This money will be used for to increase revenues through acquisitions and fleet realignment.
Thestreet.com shows estimates from $-0.35 to $0.07 with very depressed guidance through the rest of 2013 with growth expected in 2014. Based on sales and salvage late in the first quarter cash should again be readily available. Based on income and working days that have largely been unaffected, the expectation was that earnings are more likely to remain near two year averages though weighed down to something like $0.02 given the same $0.30 dividend. To be sure, the 0.03 was a surprise to the upside; the loss on sales will be seen as bullish since the unchartered vessels were actually threats to the business.
No doubt risks exist, but these risks have been identified and addressed appropriately for the moment. More importantly, these risks have been priced into the stock. The earnings picture was weighed on but not dramatically. Diana Containerships, Inc. has become even more nimble and aware of challenges and continues to represent a rewarding long term cash-cow for investors. Don't expect the yield to remain this high as the stock price will likely emerge from single-digits by the end of the year.
Technically, the stock has come up nearly 6.5% the past 5 days not including today's near 4% increase after earnings were announced and accurately reflects the beginning of a new bullish trend. Dividends this big present challenges to technical analysis but there is no reason to wait until after the dividend payout, now is the time to get into this stock. One important technical bullish note is the support provided by higher-lows ($4.97, March 14th, 2013 & $5.07, April 18th, 2013). The nearest resistance was $6.76 February 28th, this would represent a +17.6% reward potential from yesterday's close should the trend continue. This is the likely bullish scenario, however, another plausible case for DCIX is double digit prices by the end of the year, a very lucrative stock that pays investors handsomely.
Taken with the aforementioned bullish fundamental analysis, it is more likely the resistance will tested rather than support, waiting for a dip from a dividend payout is a good way to miss $0.30 a share payout. Dips for Diana Containerships, Inc. will be eaten up quickly as the small beat has already boosted Diana very nicely, but don't miss this excellent buying opportunity. After today's call, expect announcements throughout 2013 as the company wraps up its window shopping and acquires more yield-generating large containerships. Navigate to Diana Containerships for value and cash for the foreseeable future.