High-Risk Shippers Face Continued Headwinds

by: Zvi Bar

Shipping has undergone significant volume reductions and increases since the financial crisis began. Many shippers expanded their fleets prior to the crisis. Shipping volumes have since declined and then stabilized, so far at least. The industry is left with the present overcapacity and concern over future demand increases and potential decreases. Moreover, much of this overcapacity development was leveraged, leaving several competitors with problematic levels of debt and an aging, relatively unused fleet.

This downturn pushed the index down, and now several competitors within the sector are trading below book value, and also liquidated valuations, with fear of bankruptcy and/or selling off ships. Selling of ships may only occur after certain bankruptcies, should would-be buyers be current bondholders. The shipping business is fragmented and the overcapacity could keep margins low. Many issues could affect shipping, including potential European failures, Asian recessions and further Middle East instability, among domestic and other risks. Shipping demand can also eventually grow to where present capacity cannot satisfy it.

This business cycle is common and usually results in some companies failing while others survive, stronger and/or with greater market share. The survivors are still unknown, which creates uncertainty and potentially undervalued equities. Nonetheless, the recent broad concerns over global growth and demand highlight the concerns and issues that have plagued the shippers.

Below are seven low-priced, high-beta shippers that I have previously identified, listed in alphabetical order. I have also included their 1-month, 3-month, 6-month and 2011-to-date share price performances.

DryShips, Inc (NASDAQ:DRYS)

  • 1-month: -37.59%
  • 3-month: -57.28%
  • 6-month: -60.82%
  • 2011-to-date: -66.45%

Eagle Bulk Shipping, Inc. (NASDAQ:EGLE)

  • 1-month: -20.67%
  • 3-month: -45.38%
  • 6-month: -62.63%
  • 2011-to-date: -71.48%

Excel Maritime Carriers, Ltd. (NYSE:EXM)

  • 1-month: -2.67%
  • 3-month: -42.59%
  • 6-month: -57.28%
  • 2011-to-date: -67.67%

Genco Shipping & Trading Ltd. (NYSE:GNK)

  • 1-month: -9.78%
  • 3-month: -20.87%
  • 6-month: -43.75%
  • 2011-to-date: -61.00%

Navios Maritime Holdings Inc. (NYSE:NM)

  • 1-month: -17.60%
  • 3-month: -43.38%
  • 6-month: -50.59%
  • 2011-to-date: -44.13%

Overseas Shipholding Group Inc. (NYSE:OSG)

  • 1-month: -23.44%
  • 3-month: -54.42%
  • 6-month: -60.34%
  • 2011-to-date: -64.79%

Paragon Shipping Inc. (PRGN)

  • 1-month: -41.72%
  • 3-month: -63.00%
  • 6-month: -73.09%
  • 2011-to-date: -78.43%

Many argued that these companies looked cheap at the start of 2011, but they have all since fallen between 44 and 79 percent. See the 2011-to-date chart, below (click chart to enlarge):
Click to enlarge
Navios is by the far the best performer since the start of the year, but it is still down over 40 percent, largely after falling that much over the last three months. The other six are down at least 60 percent within 2011. None are positive over any of these 1-month, 3-month, 6-month and 2011-to-date terms.

The market appears to continue to anticipate that at least some of these shippers have a high probability of exiting the market or further diluting shareholder value to sustain their businesses. A very likely occurrence continues to be that one or several shipping competitors exit the market, and that the remaining survivors absorb the market and capacity. Additionally, some competitors may merge or acquire others where opportunities are seen.

These companies offer significant risk and potential returns. Their ownership should be limited, though exposure to shipping and transportation is generally considered appropriate in a broadly allocated portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is intended to be informative and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.