Eastern Winds Favor Diana Shipping

Do you believe that Asian economies like China and India will lead the economic recovery, and you’re looking for a way to make money from that? Take a look at Diana Shipping (DSX).

At current prices, Diana is about significant upside and limited downside. The shipping industry, which is characterized by incredible volatility, is facing two countervailing forces.

On one hand, there is excess construction of new ships dating from the pre-crisis market high. During this period, the Baltic Dry Index (BDI), which measures the price of shipping dry bulk commodities (the service that Diana provides), hit a high of 11,793 points in May 2008. The BDI hit a low of 663 points in December 2008, a 94% drop,^[1] and has now come to a low intermediate point of 2,468 as of August 21.

Although new ship orders have nearly disappeared and there is some pressure to cancel existing projects, the shipbuilding industry has been sustained by existing orders through the financial crisis, including an effort by the Chinese to beef up the size of their own mercantile fleet ^[2]. This suggests an oversupply of ships and lower shipping rates down the road.

The countermanding trend, however, is that aside from the lengthy process of completing these ships in the current environment, there are financial obstacles to getting them in the water to move goods, and incentives to not do so. The first is financing. Shipping was hammered by the crash in shipping prices during the crisis, and shipping banks are not well positioned to write loans ^[3]_.

When the shippers do buy, the need for cash flow will press them to deploy the ships as soon as possible regardless of how low the price.

The second is that because of how the shipping sectors work, shipyards and ship owners have a mutual incentive to delay the completion of pending orders. Even though contracts may be in place, the yards are motivated to work with the owners to delay delivery because they don’t generally want to keep the ships.

While shipyards do sometimes become ship owners, providing unwelcome competition to the traditional owners—and there is evidence that is presently happening in some quarters—that kind of conglomerate structure ultimately dilutes profit. Ship owners make money from effectively managing their risks as shipping fees go up and down, trying to make the best decisions on when to lock their ships into contracts and when to purchase new ships to meet future demand. Shipbuilding is more focused on steadier margins, getting the best contract price to produce a ship and then constructing it to specifications.

Combining the two deprives the shipyard of its basic and arguably most predictable opportunity for profit, a good contract price for a ship, because the ship will be sailing on the yard’s own account ^_[4]. Diana is keenly aware of this backdrop ^[5].

Sailing above all this, Diana built a fleet that is lean, new, and was largely booked when the bottom fell out of the market ^[6]_. Its debt/equity and debt/asset ratios, 0.23 and 0.17 respectively, are stunningly low compared to peers Genco Shipping (GNK) (1.49 and 0.59), DryShips (DRYS) (1.12 and 0.47), and Navios Maritime (NM) (1.41 and 0.49). Now with a bundle of cash from a well-timed equity offering in May that raised $218 million at $16.67 a share, Diana can afford to buy ships meeting its exacting specifications at fire sale prices, all while it continues to profitably function ^[7]_.

Of course a big unknown is what will happen in Asia. Commentators tend to focus on certain big commodities and customers, like iron ore and coal ordered by China, as driving the train since that’s what they’re familiar with. My own sentiment is that this focus tends to overlook all the other possibilities for increased demand in this wildly developing region—whether it be aluminum for new car industries, cement for new construction, or grain for expanding economies shifting from agriculture to manufacturing—so that the potential for the market being surprised to the upside at some point is high.

Finally, as well run as the company is, I would not view Diana as the best stock to hold for the long term without watching it. The lows in shipping are low, and investors may want to trim holdings after a big rise before the next downturn. That being said, we are now far enough along to see who in the dry bulk sector is best positioned to make money when the East shifts back into high gear. The case for Diana is strong, and those who jump on board now in the $12-$13 range ($13.36 at close on August 21) will likely be able to make an attractive profit.

Disclosure: The author is long on Diana Shipping as of the original publication date of this post. The author does not hold a securities position in Genco Shipping (GNK), DryShips (DRYS), or Navios Maritime (NM).

Footnotes

1. “Baltic Dry Index,” from Wikipedia, July 30, 2009 here.
2. See public download of the China Research and Intelligence (CRI) Report, “Report of Chinese Shipbuilding Industry under the International Financial Crisis,” March 16, 2009, here. See also OECD, “Fall in shipbuilding set to continue for some time, says OECD Council Working Party on Shipbuilding,” July 17, 2009, here.
3. See Diana Shipping Q1 2009 Transcript (August 6, 2009), p. 5, May 6, 2009, here.
4. The Rise of “Shipbuilder Owner,” World Yards, June 8, 2009, here.
5. See Diana Shipping Q2 2009 Transcript (August 6, 2009), p. 4 here.
6. See “Diana Shipping” at Wikinvest, June 30, 2009 here.
7. See Diana Shipping Q2 2009 Transcript (August 6, 2009), here.

Comments

[Novice Trader:]

When I invest in stocks (at this particular point in time - Post crash) I'm looking for stocks which off a potential 5x rebound within a very short period of time. This stock doesn't even appear to have a 2x rebound ahead of it. This based on my uneducated view of things and with just a quick glance at the 3 year char. It seems to me that there are equally safe places to put one's money which offer a greater reward.

Aug 23 01:52 PM

[Ecomike:]

PRGN and EXM are way undervalued compared to DSX, and have much better PE values (2:1) right now compared to DSX. ESEA is another great value. DSX has no dividend, and no sign of intentions to renew a dividend any time soon. NMM, NM, PRGN, and ESEA are all paying nice stable dividends, and several have them have much lower PEs, making their upside potentials more attractive.

Aug 23 04:22 PM

[TJ Schoenlein:]

Very good article, clear, logical, makes sense.
I think it's time to add a couple of shippers to the portfolio.

Aug 23 08:47 PM

[enigmadude:]

I agree that a couple of shipping stocks would be a good choice right now. I am long PRGN, and thinking of getting back into NM.

Aug 24 09:41 AM

[bfras921:]

ecomike in post 2 is totally off base.

First dsx pays a dividend

prgn and exm have a negative net worth if you factor in the current value of the ships. Like most bulker stocks are on the books at historical cost and both prgn and exm bot their ships at the highs.

Both are debt laden

Dsx on the other hand has little to no "net" debt. In fact they are the most underleverage name in the space

Finally, the ceo isnt a crook like drys economoo, exm ceo gave himself a huge bonus and warrants to buy stock at a cheap price

I dont like self serving moves that dilute the little guy

Aug 24 10:20 AM

[bfras921:]

Nm is a good name as well

egle would be a good name if the ceo pay wasnt obscene. last year he screwed his shareholders with a 21 m pay package


On Aug 24 09:41 AM enigmadude wrote:

> I agree that a couple of shipping stocks would be a good choice right
> now. I am long PRGN, and thinking of getting back into NM.

Aug 24 10:22 AM

[ramisle:]

bfras,
DSX suspended it's dividend last year in order to save cash for ship purchases later this year, when they expect prices to be cheapest. The only way for shippers to have EPS growth while rates are low and stagnant, will be through accretive acquisitions. And to do that without serious dilution.

Aug 24 10:53 AM

[PutneyHillYank:]

Yeah I play em all and recently had my long in Diana taken out really quick with a sitting GTC I forgot about, at a profit duh. LOL I juggle lots of positions but make lots of money. Ditto GNK lifted on a gtc i forgot about, and recently loaded esea till it got to a green position and I sold 5500 shares at market well the boys took straight adv of that and dropped their bids but I got I OUT yes and green and its heatening to see ESEA going nowhere today. I was surprise they cant handle Volume.

Aug 24 06:48 PM

[PutneyHillYank:]

Big positions now are TZA and SOLR and LPL. They keep dropping ask and I keep buying. I always win in the end. Blew out HSVLY at some ridiculous high price this AM too

Aug 24 06:51 PM

[PutneyHillYank:]

Also I have lots of really keen specs AGXM and Western Potash adr I have made tons on these two and even now am accunulating cause way to cheap. AGXM does 'rare earth' in Patagonia while Potash is well potash outs Saskatchwen

Aug 24 06:59 PM

[PutneyHillYank:]

Its weird cause LPL use the indium that AGXM mines

Aug 24 07:01 PM

[31October:]

I have a formula to predict the best companies. For shipping, I came up with GNK, PRGN, SBLK; DSX was number 4. The formula works okay. But I ignore the numbers sometimes.
I $old EXM last month (but will rebuy later), am in the red on NM (low on the list, but I like their business.)

Any shippers should be treated with caution. If China decides internal control outweighs stockpiling, American CRE declines, the dollar moves too much, or employment (real, not government fudge) gets worse, then trade could falter sharply.

Aug 25 01:32 PM

[31October:]

P.s. - Audit Integrity scores for DSX & EXM have dropped since last time I updated. That could matter.
Debt/equity and quick ratio are better for DSX than EXM.
If you really believe shipping is about to explode (I don't), then GNK is well-positioned for fast growth, with more leverage (debt) and cash on hand, and faster sales growth rate.

Aug 26 10:58 AM

[buyforeclos...:]

Agreed...bought at 13 bucks and will cost average from here

Aug 31 12:27 PM

[ramisle:]

I fully believe the reason why DSX has not bought ships yet is because there is still more bad times ahead for the BDI, and the value of ships. Although Chinese buyers and Vale have been buying up older Capesize tonnage, the cost of newer ships could still fall. The record imports of Iron Ore to China over the first seven months of the year was unsustainable, and now they have three months stockpiled, huge inventories of steel and plummeting steel prices. The demand was not there. And Arcelor Mittal and the rest of the worlds steel mills are working at 50% production.
Far more ships are hitting the water than are being scrapped.
DSX is a great company that is in a good position to buy new ships cheap and charter them at decent rates.
DSX is a good pick, it just might be too early.

PRGN has only 12 ships and five of them will reset at charters that are at much lower rates this quarter and next. Their earnings are going to take quite a hit.
Calm Seas from $37,000 per day, to $15,775 per day.
Deep Seas $34,250 to $ 15,000
Pearl Seas $51,300 to $ 37,500
Coral Seas $54,000 to $15,775
Sapphire Seas $26,750 to $ 22,750

Aug 31 04:03 PM

[Aricool:]

like what? From what I tell in the market to get a quick 3-5x rebound you have to buy very high beta trash, sub $1 penney stocks- at huge risk of bankrupcy.


On Aug 23 01:52 PM Novice Trader wrote:

> When I invest in stocks (at this particular point in time - Post
> crash) I'm looking for stocks which off a potential 5x rebound within
> a very short period of time. This stock doesn't even appear to have
> a 2x rebound ahead of it. This based on my uneducated view of things
> and with just a quick glance at the 3 year char. It seems to me that
> there are equally safe places to put one's money which offer a greater
> reward.

Sep 12 10:30 PM