Four Shippers Emerging from the Mire

By Skymist

After a thrilling two-week rally in the stock market during early September, shippers began to fall. They had been enjoying a nice rally on the general premise of economic recovery, market stabilization, and rising materials prices. But suddenly on September 17th, the shipper sector broke, and leading names fell - plummeted, actually, at a much faster rate than the modest pullback in the general market would have implied.

With shippers today generally on the rise again, it is worthwhile to look at the reasons for the mid September breakdown. What was the number one reason? I would have to say it was the Baltic Index, which quantifies the prices shippers get for new contracts. It had stabilized at near 2400 in early September, and then began a robust rise, only to suddenly stop short. It began falling, slowly at first, then accelerating. By the 17th it was clear that the BDI was tanking, and the shippers as a group followed. The timing of the movements of BDI seemed to be the key. A market advance which coincides with a BDI advance is a powerful motivator for the depressed shipping stocks. The "robust rise" of early September triggered the sector advance. Few sectors snowball as readily as the shippers. Within days, shippers were moving to recent highs, but the BDI reversal stopped the process entirely.

Of course, the negative press didn't help either. The blogs were heavily negative on the shippers, pointing to the newly delivered ships and declaring that we need fewer ships, not more, in current economic conditions. Finally, Navios (NM) picked that moment to float a new stock offering, diluting their stockholders. The market knows that new offerings are one of the traditional signs of an overbought stock - in a sense, it is the ultimate in "insider selling".

How does today's rising shipper sector compare to September 17th? Well, the BDI is finally responding positively this time, passing 2800, rising 5 days in a row, and rising even faster than in early September. The chart also shows an even more key fact - the BDI is not only rising but is above its 200-day moving average; in mid-September at the time of the shipper retreat the BDI was well below its 200-day ma. No doubt, there is a lot of money on the sidelines which won't come back into the market until we have a rising BDI above its 200dma. That alone can explain a lot of the listless behavior of the shipper stocks in the past few months, but clearly the situation is different today. Sentiment is higher, with positive blog stories and upgrades. The sector is riding a more optimistic wave, and any key event could set off an upside stampede - a large earnings beat, a raised or reinstated dividend, or an acquisition.

The four stocks I am highlighting here are the key names I am watching. Today, Diana Shipping (DSX) became the first of the shippers to pull strongly above its Sept. 17 high. It was followed within minutes by Eagle Bulk Shipping (EGLE). I note with some satisfaction that DryShips (DRYS) is not a leader here - "satisfaction" because market karma dictates that those names issuing the most new stock should not be the first to benefit from a sector recovery, and indeed, that may be the case, DRYS being held back along with FreeSeas (FREE), Navios Maritime Holdings (NM), and others who resorted to dilution as a remedy.

TBS International (TBSI) has an interesting chart. See how the "stick" part of the candlesticks are long at the tops during the mid-Sept peak? This can be visualized as a price region in which there was heavy selling or shorting, each day forcing the price down after initial gains. The zone from 9.50 to about 9.85 represents a region which, once traversed, can lead to increased short-covering. TBSI has a short ratio of over 3.5, and the fuel which is the short positions could potentially power the stock higher very quickly - perhaps another dollar in just a couple of days. Given continued BDI strength, I feel we could see TBSI at $11 by early next week. The options are cheap, too.

Paragon Shipping (PRGN) is one of the best "sleeper" plays in the shipper segment. As the leaders pull higher, we can expect to see this tiny but well run company move up in price quickly and quietly. Yes, they are still paying a dividend.

If you want to participate in the shipper rally, take your eyes off DRYS, and start watching the new leaders. Good luck!

Disclosure: I am long TBSI, GNK, EGLE, PRGN, and ESEA.

Comments

[KGM34:]

Your comment on NM is wrong. It was "NMM" (two Ms) that announced the stock offering. This was a common misconception because NMM is affiliated with NM, but is still a standalone company.

What NM did was to issue convertible preferred shares for their acquired ships. Those converts have a conversion price in the range of $12 - $20.

Oct 22 07:03 AM

[skipper54:]

Firstly, Shippers are those who load cargo on ships (generally exporters). All the companies you mention should be referred to as 'shipowners'.
Secondly, the dry cargo bulk sector has in the past been the object of speculation (particularly DRYS) which has borne little reference to reality (which is basically the law of supply and demand). You mention the ''listless behavior of the shipper stocks in the past few months" but that listlessness precisely reflects our market and also the lack of interest from the speculators. You are trying to pump the shares up again in order to get back some of that old volatility so beloved of the speculator but I can tell you that the fundamentals suck. Quite simply, there will be millions of tons of new ships coming into the market over the next 2 years without the corresponding increase in cargo volumes. And the balance sheets of today include vessels that are vastly over-valued. And we have seen that the banks are finally beginning to get tougher - don't expect any more covenant waivers: it will be 'pay up or go bust'. Or am I just a pessimist ....?!

Oct 22 08:27 AM

[Danny Furman:]

KGM34 is correct above, however I'm curious why adding stock to buy ships is negative for a company in Brazil. Imports and exports there figure to expand exponentially.

Oct 22 09:03 AM

[Alan Young:]

Thanks for an insightful and informative article.

Skipper54 makes valid points, but this sector has suffered so long, surely these factors are already priced in.

Oct 22 09:07 AM

[Alan Young:]

NMM did offer new common stock on 9/18, but has now recovered to the pre-dilution price. Good trick! And still a 12% dividend? Watch for next quarter's dividend announcement next week.

Oct 22 09:14 AM

[wuj13:]

I was waiting for you to mention PRGN, have been following the company for a few months, definitely undervalued. I think it is in a great position to grow in the future, and very cheap for their position.

However, they have locked in shipping rates for the next year and a half; profits will be steady but I don't think there will be many surprises with the company. A great long term play for sure.

Oct 22 09:58 AM

[carmen77:]

this article is pretty terrible... Analysis of shippers using charts...WOW!!!

That being said. I like DSX and OSG. High return on equity, Low debt, low market price to book price.

Oct 22 10:12 AM

[LCM:]

what about TORM ???? anyone have thoughts on them? ticker TRMD

Oct 22 12:08 PM

[HerrHansa:]

Marine Transportation sector needs to be judged on day rates and percentages of ships under charter. There is currently a worse oversupply problem in bulk and cargo than there exists in tankers. When the rates go back up, then some well managed companies can gain profits. BDI is one measure, but when you evaluate each company (not just the four mentioned) then you learn that the clean tanker or dirty tanker rates mean more for some, and Capesize rates mean more for other. Without evaluating types of ships, routes, and particular charters, you will not get an accurate feel for the future prospects of a company.

navigatemag.ru/

That above link is a fast and easy way to watch shipping rates, including BDI (Baltic Dry Index). Keep in mind that worldwide cargo is at an overcapacity level, which keeps rates down in the short term. A few companies are trying to affect the rates, like large players Maersk, CMA CGM, and MSC, but they are only one segment of marine transportation.

I was recently in Houston, and it was great to see more tankers of all types than there were a few months ago. A counter-check on my vessel tracking software confirmed that ships are finally starting to move more, though tankships are getting more action than others. Whether this is an interim lift, a bottom, or the start of a recovery, I think is slightly too early to tell. If you are long, then there may be some good plays, but it depends upon Q4 2009 rate improvements.

Disclosure: long Ship Finance International (SFL), Golar LNG (GLNG), and DHT Maritime (DHT)

Oct 22 12:39 PM

[coprophagous:]

The only charts you can rely on in shiiping are the navigation ones and these analyst graphics ignore all the fundamentals that those active in shipping have been seeing for months. Todays spot rates in dry bulk are a cash drain on all companies in the sector as they barely cover operating costs, do not pay interest or G&A. Furthermore the number of days the ships are employed has also shrunk sharply.
The newbuilding deliveries in this sector as verified by all the major shipbrokers will amount to 3,000 newships over the next 18 months.
To suggest that this sector has suffered so long and should therefore recover is rubbish. The last two shipping recessions in the eighties(dry bulk) lasted 10 years and the nineties(tankers) lasted 6 years.
It will take 10 years for the freight markets to absorb the present fleet and the newbuildings.

Oct 22 01:26 PM

[vaultvix:]

Skipper54, HerrHansa and coprophagous above seem to understand the shipping industry far better than the author of this article. I am always amazed at the way "equity people" take the BDI as gospel. Yes, ship sizes, cargos, routes, contracts all matter...and the index doesn't even touch tankers and container ships. Hardly a picture of the shipping market, but easy to see, so often, but in my opinion incorrectly, used as a proxy.

You know that lack of lending people are screaming about in Germany? Well...a little of it has to do with the fact that the banks have to reserve more and more as their shipping loans (which, it turns out, aren't all that liquid...) deteriorate. Put up more capital for those loans, and there isn't a whole lot left for the auto parts maker. (Bad example--government will make that loan. OK, the retailer.)

These stocks might go up, but it won't be because the "shipping market" has suddenly revived. A stop in Singapore might be convincing. Or just ask Maersk.

Oct 22 05:40 PM

[long_on_oil:]

TRMD is a great play on shipping if you like nice dividends. But beware because 30% of your dividend goes to foreign taxes. The yield is still over 5%. I have owned this stock since Jan 08 and have received great dividends. If you go to the corporate web page and download the annual reports you will find TRMD is a old company with very good management. They are also positioning themselves for a great future. I don't think you can go wrong buying this stock below $12.

Oct 22 05:48 PM

[co sam:]

what about nordic american tanker (nat) over priced?

Oct 22 07:23 PM

[ramisle:]

It didn't bother you that PRGN diluted shares from 27 million to 48 million?
And yes they did sign long term charters on 6 of their 12 ships that will cover 98% of 2009, but the changes to those charters will result in $110,000 less per day, over $8 million less revenue per quarter. The next two earnings reports will be a major disappointment.
EGLE will be selling shares, they have 22 new Supramax to pay for. And they reset some charters lower. They have filed a shelf offering.
TBSI has a fleet of very old, small Handymax and Tweendeckers. Their value has fallen so much as to put them in breach of loan covenants, they will have to pay down the debt to be in compliance when the waivers expire. They also have 6 new ships to pay for when they are losing money. They have filed a shelf offering.
Most of these companies are in breach of loan covenants because of low ship valuations, and most have to sell stock to reduce debt, they also had increases in interest and restricted cash as part of their waivers. Those waivers expire in one year at which point they must have a 125% collateral to debt maintenance ratio. Ship values are not rising.
DSX has little debt, and Cash to pick up distressed assets.
And NM has secured senior notes to cover new ships and consolidate debt. They have new ships arriving with financing in place.
OCNF is a disaster, massive dilution like DRYS. EXM is deep in debt. And phony earnings.
Read the SEC filings and by all means, read the Fleet Deployment Page to see when these companies will take an earnings hit.
It is a very transparent sector. The biggest problem is the growth of the fleet will far outpace the growth in demand for two years.
drewry.co.uk
weberseas.com
brs-paris.com
cotzias.gr
worldyards.com
lloydslist.com
fearnleys.com
nilimar.com
platou.com
steelguru.com
drybulkindex.com

Oct 22 08:14 PM

[Skymist:]

On Oct 22 05:40 PM vaultvix wrote:
> Skipper54, HerrHansa and coprophagous above seem to understand the
> shipping industry far better than the author of this article.

I wrote the article, and those 3 people possibly do understand the shipping industry better, but the article is about shipping stock prices, not shipping earnings. The article I wrote had nothing to do with fundamentals, except indirectly. I wrote about the short-term timing of price movements of shipping company stock. You can tell, because nowhere do I say anything like "company X earnings should improve", etc. The article can be summarized as: "the shippers have moved up in price, and the leaders are stocks like DSX and EGLE instead of DRYS, and it probably is because the stock market is looking at the BDI". Responders here are saying that the business conditions of these companies is going to continue to be terrible, and I agree totally. For goodness sake, I have no intention of holding any of these stocks longer than a month. The only thing that matters, in the context of this article, is how the severely depressed stock prices of these companies behave in the next few weeks. No matter how depressed a sector may be, its shares are still tradeable, and one can make money trading them. I welcome criticism of anything I said in the article regarding stock prices, their timing, and market sentiment. That's what I'm interested in here.
Regarding NM, yes, that should have been NMM. That was the fault of a news service (Yahoo) which misfiled the story under the wrong symbol, and I accidentally passed the error along to you all.

Oct 22 08:24 PM

[Mark Anthony:]

You forget to mention EXM. In terms of shipping capacity you can buy per dollar of investment, EXM is the best valuation. It is my largest shipping holdings. I also kind of like EGLE as well.

Oct 22 11:02 PM

[Windsun33:]

Just a note, but the BDI is up now for the 6th day in a row. If it keeps going up, I am going to shift a little more cash into the dry shippers.

www.dowjonesclose.com/...

Oct 22 11:54 PM

[parkwood:]

The rate crisis maybe is on the way, but not imminent. Short term-wise, BDI and the sector are dominated by speculations, that's why you should think about the things more than the shipping fundamentals, if you want to be a good trader. For examples, now the Capesize rate is up a few thousand dollars everyday, do you really believe it is demand driven? Do you know why? Do you know what's the fundamental of this kind of speculation?

The stock prices are being rigged by the market makers, they are able to do it because the market is full of gullible traders and dumb money, these guys only focus on their charts and candle sticks everyday, they care or know little about fundamentals of shipping industry. If you are a smart trader, instead of fighting against the tape, find the bubble and ride it. If you are a long term investor, just forget all of these stocks.

Oct 23 12:34 AM

[Nettligent:]

2010 is a very bad years for shippers.

Oct 23 05:12 AM

[Mark Anthony:]

On Oct 23 12:34 AM parkwood wrote:

> The rate crisis maybe is on the way, but not imminent. Short term-wise,
> BDI and the sector are dominated by speculations, that's why you
> should think about the things more than the shipping fundamentals,
> if you want to be a good trader. For examples, now the Capesize rate
> is up a few thousand dollars everyday, do you really believe it is
> demand driven? Do you know why? Do you know what's the fundamental
> of this kind of speculation?

Parkwood:

You don't know what you are talking about. BDI index is the purest index that is purely driven by supply/demand fundamentals, NOT by speculation. It is impossible for hedge funds to speculate on the dry shipping spot market. The only participants in the dry bulk shipping spot market are mechants who actually have goods to be shipped, and ship owners who actually have ships for lease. You can not buy/sell/trade BDI shares. There is no such thing as BDI shares. BDI is a calculated pure number, based on spot ship hiring rates.

Oct 23 05:15 AM

[Anthony Alfidi:]

Has anyone seriously looked at the debt load that DRYS and other shippers carry? The economics of transocean shipping are pretty bad right now and not many firms have the pricing power needed to lift their revenue. Shippers are doing poorly for more reasons than just the Baltic Dry Index's decline.

Oct 23 07:22 AM

[sdfsdf:]

This is a good article for people who want to spot some good short term candidates to trade for lets say few weeks. The primes of the article is not fundamental analysis of these companies but a mere short term trade prospects in a deeply oversold sector.

Oct 23 12:37 PM

[Windsun33:]

BDI up again today, 7th day in a row, but only by a small amount.

And DRYS is one of the shippers I would stay away from, I think it is the most debt ridden of the lot.

Oct 23 12:41 PM

[parkwood:]

Mark, actually I don't understand what you are talking about? Hedge fund? Have you heard of shipping hedge funds and do you know what they have done in last year crazy BDI market? If you haven't, should we let the discussion stop here or go ahead? Even for those owners or brokers, when they ask a much higher rate the next day, you don't think there has any speculation in their mind? This is an index that can be up or down 50%-100% just in a few days, it is a purest index of supply/demand? Nowaday, more and more investment banks participate in shipping business, I don't say they want to manipulate, but is this business as simple and naive as what you have imagined? Enough is enough, your arguments are more like from a kid's wisdom.

About "BDI share", yes, BDI is not the stock, do you think human beings have no way to speculate besides the stock market? The BDI popped suddenly in the past second quarter, it was fueled by iron ore speculation in China, even the smartest analyst couldn't predict this in that economic environment.

Mark Anthony wrote:

You don't know what you are talking about. BDI index is the purest index that is purely driven by supply/demand fundamentals, NOT by speculation. It is impossible for hedge funds to speculate on the dry shipping spot market. The only participants in the dry bulk shipping spot market are mechants who actually have goods to be shipped, and ship owners who actually have ships for lease. You can not buy/sell/trade BDI shares. There is no such thing as BDI shares. BDI is a calculated pure number, based on spot ship hiring rates.

Oct 24 01:09 AM

[billf921:]

the whole group sucks but you need to know a few basic things

derrys, the ceo is a crook avoid forever

exm, the ceo fired the best dry guy and overpaid for qmar at the top of the market

dsx, honest ceo, low debt makes them a buy canidate when fundamentals improve

nm- i trust the ceo, they have alot of debt, but id buy nm as they lock in long term rates

egle

nice company problem soph the ceo skimed off 22 m in cash last year in obscene salary gives obamas commies something to gripe about. dont you think 2 m per year is fair for a guy that lost 90 % of shareholderr value

soph you are a disgrace to the human race. his cfo is not much better taking s multimillion dollar salary

ocnf is run by the nephew of drys , would you do business with the nephew of al capone?

Oct 24 11:10 AM

[SlamNT:]

Fundamentals might look week...but technicals looks ready for a 100m dash...u decide!

Oct 25 12:54 PM

[Danny Furman:]

I watched for it and you couldn't have been more wrong.


On Oct 22 09:14 AM Alan Young wrote:

> NMM did offer new common stock on 9/18, but has now recovered to
> the pre-dilution price. Good trick! And still a 12% dividend? Watch
> for next quarter's dividend announcement next week.

Nov 01 01:39 PM

[Skymist:]

On Nov 01 01:39 PM Danny Furman wrote:
> I watched for it and you couldn't have been more wrong.

With regard to NMM, wrong about what?
(1) They beat earnings estimates.
(2) They raised their dividend.
(3) Stock is up over 19% since I wrote the above article. If you had bought it you would have made a nice profit.

If you're talking about NM, then their earnings aren't out yet, but their stock is up even more than NMM since this article.

So, I don't accept your criticism on this point.

Skymist (author of this article)

Nov 16 09:38 PM