Shipping Value Play In The Baltic Dry Index Disconnect

by: J Mintzmyer

As global economic uncertainty lingers and the shipping industry is faced with a glut of new building vessels, global shipping stocks have tanked over the past 3-6 months. Almost all shipping companies are trading below stated book value, and some including Genco (NYSE:GNK), Excel Maritime (NYSE:EXM) and Starbulk Carriers (NASDAQ:SBLK) are trading at or below market liquidation value. Investors fear that low current spot rates will cause losses to increase as long-term charters expire and must be renewed. However, the current BDI shows a different spot-market picture — one where rates are the strongest that they have been in 6 months. The Baltic Dry Index surge is propelled by strong increases in Capesize rates, which will positively affect the fleet portfolios of most shipping companies, both in terms of revenue potential and secondary market value.

6 Month BDI chart

(Click to enlarge)

Disconnect Between Market Conditions and Stock Pricing:

While the BDI has surged, most shipping stocks have continued to sink. Excel Maritime (EXM) has plunged 57% in the past 6 months; Genco (GNK) has dropped 33%; Starbulk Carriers (SBLK) has declined 46%, Dry Ships (NASDAQ:DRYS) has dipped 38%; even industry stalwart Diana Shipping (NYSE:DSX) has lost over 30% in market price.

Possible Reasons for Disconnect:

This represents an underlying fear in investors that goes beyond any near to mid-term threats.

Perhaps investors are afraid of bankruptcy losses?

Four out of the 5 companies mentioned above are trading near or below liquidation value, the 5th company has extremely strong balance sheets (current ratio of almost 11, 24% debt to assets).

Perhaps investors are afraid of low spot market rates?

The BDI is on a resurgence, showing the strongest levels in 9 months.

Perhaps investors are afraid of an upcoming glut of ships that will make the supply/demand situation worse?

Genco’s report from 27 July 2011 highlights the current levels of delivery vs. scrapping as well as industry demand side projections. Scrapping is near an all-time high, and a high relative percentage of deliveries for 2011 and 2012 have already been delayed or cancelled. This reduces the future glut impact of deliveries, although a threat remains. However, these figures have been known since early to mid-2010, and the supply numbers have only improved (reduced projections) since then. Demand hit a few snags (Japan Tsunami, Australian flooding, Chinese pullback) in 2010, but projections have remained stable since then.

My thesis:

Perhaps investors are simply in an uncontrolled panic zone, and while the stocks have hit the intrinsic floor of valuation, speculators continue to drop the stock deeper into a pricing basement?

Based on my analysis, I believe that most shipping stocks represent an unprecedented value opportunity. I own a wide-range of shipping stocks, the financially safest (in my portfolio) is Diana Shipping and the financially weakest is Seanergy Maritime. Starbulk also delivers a strong dividend yield (currently at 15%); however, their dividend is at high risk of being cut. Dryships boasts a strong upside with its OceanRig exposure to the oil drilling market; however management has been proven to be out of touch with shareholders.

Disclosure: I am long DSX, DRYS, EXM, GNK, SBLK, SHIP.