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The shipping sector has been a significant laggard over the past year when compared to the overall market performance. Year-to-date, the Guggenheim Shipping ETF (SEA) has returned -12.6% compared to a return of +5.5% by the Spider S&P 500 ETF (SPY). Taking the difference of these two percentages shows that the shipping sector has underperformed the S&P 500 by about 18% YTD.

The cause of the shipping sector's underperformance is a basic supply-demand imbalance. The number of new ships entering the market has outpaced the number of ships being scrapped. This fact, coupled with overall demand for shippers increasing at a smaller rate when compared with the supply side, has led to a significant decline in shipping charter rates over the last year. The Baltic Dry Index (BDI) is down over 20% YTD and more than 65% over the last year, as illustrated by the chart below. Analysts of the shipping industry sometimes base BDI price relative to a BDI value of 3,000. Based on the current BDI closing value of 1,349, the BDI is 55% below the 3,000 BDI threshold.

Given the current low charter-rate environment, one must be judicious when selecting which shippers to invest in. Numerous dry bulk shipping companies have substantial debt on their balance sheets, and some of these shippers may not able to adequately service their debt if the low-rate environment persists. These are the types of companies I wish to avoid. To do this, I utilize a debt-to-earnings metric defined as:

Adjusted annualized EBITDA is used instead of EBITDA because EBITDA can often be skewed for a given quarter as a result of special one-time items (e.g. gains / losses on sale of vessel, impairments, etc.). The lower the value of the debt-to-earnings metric the better – either a particular company has a low debt load or generates enough earnings to cover its debt. A value less than unity is especially good.

Results

I calculated the debt-to-earnings metric for the following shipping companies using the latest earnings information: Diana Shipping (DSX), Navios Maritime (NM), Paragon Shipping (PRGN), Eagle Bulk Shipping (EGLE), Excel Maritime Carriers (EXM), Freeseas (FREE), Genco Shipping (GNK), Ocean Freight (OCNF), Dryships (DRYS), Safe Bulkers (SB), and Star Bulk Carriers (SBLK). The adjusted annualized EBITDA is computed by multiplying the company’s most recent reported adjusted EBITDA by a factor of 4. The results are displayed in the table below. DSX features by far and away the best debt-to-earnings metric.

symbol

name

adj EBITDA

total debt

total cash

net debt

D:E

DSX

Diana Shipping

48

383

373

9

0.05

NM

Navios Maritime

68

689

199

490

1.81

PRGN

Paragon Shipping

15

309

165

144

2.41

SB

Safe Bulkers

34

486

54

433

3.15

SBLK

Star Bulk Carriers

14

218

35

183

3.22

DRYS

Dryships

107

2,720

970

1,750

4.08

EXM

Excel Maritime Carriers

48

1,138

87

1,051

5.47

FREE

Freeseas

5

120

9

111

5.57

GNK

Genco Shipping

68

1,872

285

1,587

5.83

OCNF

Ocean Freight

9

210

10

200

5.89

EGLE

Eagle Bulk Shipping

24

1,151

119

1,032

10.71


Conclusion

I believe that shipping rates will gradually rebound from their current levels over the next few years as the glut of new ships are absorbed into the market, future new shipbuilds decrease, and global demand for shipping increases with a rebounding world economy. Based on the analysis above PRGN, NM, and especially DSX, are well-positioned to weather the current low-rate environment.


Disclosure: I am long DSX, NM, PRGN.

Source: A Useful Metric for Evaluating Shipping Companies