(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Diana Shipping (NYSE:DSX) is a well-established member of the highly competitive dry bulk shipping industry. The company operates a fleet of 36 dry bulk vessels (2 Newcastlemax, 10 Capesize, 3 Post-Panamax, 3 Kamsarmax and 18 Panamax) with a total capacity of 4.1 million deadweight tons. A few years back, Diana expanded its operations into the cargo shipping industry, but dry bulk shipping is still the company's primary source of revenue, however, and will remain such for the foreseeable future.
As a shipping company, Diana's performance is highly dependent on the state of the global economy. The company does little to hide their considerable dependence upon the Chinese economy. As a major consumer of steel, China is the driving force behind demand for iron ore which is one of the most common freights for dry bulk carriers.
Steel demand in China is expected to grow next year, as a result China's iron ore imports are expected to increase 6.3% to a record of 850 million tons in 2014. China is the largest consumer of iron ore in the world. The country has limited resources of high quality iron ore, as a result it will remain dependent on imported iron ore. Increase in iron ore imports will drive the dry bulk shipping rates, but the industry is witnessing a significant order book of new vessels to be delivered in this year, which may create pressure on charter rates and vessel values.
Despite the 2009 financial setback, Diana is still financially sound and one of the premier dry bulk shipping companies in the world. By far the most distinguishing aspect of the company is Diana's ability to operate with substantially lower debt levels than its peers has made it an oft cited star of the industry. Debt management is only one of many skills displayed by the company's management team which is often cited as the most respected in the industry.
Diana has a huge cash balance in its balance sheet, which created opportunities to take advantage of depressed prices to improve the company's equipment and infrastructure. It ended its third quarter with a cash balance of $316 million and a net loss of $3.2 million. With a high cash balance, the company will be able to absorb the loss and acquire additional vessels, thus expanding its fleet and enhancing its future cash generating potential. A strong balance sheet will also help the company to weather out the volatility of the industry. Diana suspended its dividend in 2008 in order to preserve cash for future acquisitions and expansion, thus making Diana no longer attractive for dividend-seeking investors.
Diana has many competitors in the dry bulk shipping industry. The industry is highly competitive and dominated many small players. The company competes on several factors such as: vessel location, size, condition, and through reputation as owner and operator. The biggest competitors to Diana Shipping include: Navios Maritime Holdings (NYSE:NM), Paragon Shipping (NASDAQ:PRGN), Eagle Bulk Shipping (NASDAQ:EGLE) and Genco Shipping (GNK). The chart below represents the key statistics for Diana and its competitors.
|Return on Assets||0.13%||-0.76%||-0.92%||-0.12%||-2.12%||-0.03%|
The chart represents that Diana's stats are almost as good or better than its competitors. Looking at Price/Book and Price/Sales ratio, Diana seems overvalued relative to its publicly-traded competitors; however, I believe it is a reflection of the financial strength of the company. Diana is larger, more liquid and less volatile than its competitors.
Another key characteristic of Diana is that it has high quality and young fleets. Weighted average age of Diana's fleet is 6.51 years. Weighted average age of Diana's competitors is presented below:
- Navios Maritime Holdings: 6.6 years
- Genco Shipping: 8.5 years
- Paragon Shipping: 7.1 years
The importance of young and high quality fleets is that it reduces Diana's operating cost, improves safety, and offers Diana a competitive advantage in securing favorable time charter rates. The cost of maintaining a vessel in good condition is directly linked to its age. Older vessels are less fuel efficient and have higher maintenance costs. Charterers also prefer to hire a younger vessel because it keeps costs low.
The subsidiary of Diana, Diana Shipping Services, controls all commercial and technical management of the fleet. This in-house management allows for higher quality performance, reliability, and efficiency in arranging time charter contracts and scheduled maintenance of each vessel. The company has built strong relationships with major international charterers and shipbuilders that will enable them to be flexible when necessary.
Diana possesses less risk, a superior management team, and more financial consistency. Its financial strength is much better than its competitors. The company represents an attractive value play in the dry bulk shipping industry. Due to its strong balance sheet, acquisition opportunities, extensive charter coverage, and compelling valuation, I believe Diana Shipping is a strong buy.