Over the last few years, the shipping industry has suffered heavily due to oversupply of ships. The industry is now seeing better days due to increasing vessel demand, driven by a massive increase in Chinese iron ore imports. The future for dry bulk shippers looks bright, as global coal and iron ore demand is predicted to rise significantly in the coming years. Many shipping companies are trading at a discount, and among them is Diana Shipping (NYSE:DSX).
Diana reported a net loss of $3.2 million for the third quarter of 2013, compared to net income of $12.3 million a year earlier. Revenue decreased 25% to $41.9 million. Although Diana reported a loss and decrease in revenue, the company reported better than expected revenue and a smaller than anticipated loss. Diana's loss is minor as compared to its peers like DryShips (NASDAQ:DRYS) and Eagle Bulk Shipping (NASDAQ:EGLE). Net loss of DryShips and Eagle Bulk for the third quarter of 2013 was $63.9 million and $37.6 million, respectively. Diana has few qualities that make it better than other dry bulk shippers. Diana's key strength is its strong balance sheet that sets this company apart from others in the sector. Due to a strong balance sheet, the company is well positioned to face any storm in the industry. There are no dominant players in the dry bulk industry. Many small shipping companies in the industry are still struggling to remain, and scrapping or selling ships to raise cash. Diana has a large cash balance that gives it the flexibility to make strategic moves like purchase ships from insolvent competitors at bargain prices. This was demonstrated by the company's recent purchase of a Capesize dry bulk vessel for $52 million. Such vessels were selling for nearly $100 million before the recession. Both DryShips and Eagle Bulk hold a significant level of debt, as a result they have less flexibility to consider strategic moves to take advantage of the industry's weak conditions.
Diana's capital structure is composed of nearly 27% debt and 73% equity. By contrast, DryShips and Eagle Bulk capital structures contain debt of 56% and 68%, respectively. A solid balance sheet also gives Diana an advantage of having greater access to capital markets and low cost of borrowing. Due to high debt, DryShips and Eagle Bulk are more exposed to interest rate risk than Diana. Interest rates are expected to rise in the coming years that could adversely affect the bottom lines of DryShips and Eagle Bulk. Due to high debt and low cash, DryShips and Eagle Bulk may face tough times, but Diana's strong balance sheet will not only protect it from bankruptcy, but also enable it to grow. Diana's strong balance sheet will be key to preserving shareholder wealth during an economic downturn.
One risk associated with Diana is that it has a small number of customers and each customer provides significant revenue to the company. If Diana were to lose one of these customers, it may not be able to secure equivalent terms on new leases. Diana is a moderate sized company. Some of its competitors are larger such as Dry Ships, but size does not give any advantage in the shipping industry, as no single company is large enough to have pricing power.
The shipping industry is now recovering. Increasing raw material and commodity demand from the China, India and developing nations will help to swallow the excess supply of ships and drive shipping rates higher. Diana is a best managed company among the dry bulk shippers. The company's superior cash and leverage will enable it to grow by exploiting opportunities as they arise. In my opinion, Diana is on the right path and in a position to deserve your investment, so I recommend a buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.