Throughout my coverage of the shipping sector, I have regarded Diana Shipping (NYSE:DSX) as the safest play in the shipping sector. However, DSX has always traded at a premium to market-adjusted book value, so I haven't vocally recommended DSX as an arbitrage-type trade, but rather as a long-term play for a more cautious investor. These safer investments often come with lower potential payouts, but DSX has recently crossed the threshold of rational valuation, and I recommend a strong buy with a guiding market-adjusted book of $10.21 against projected operating cash flows of $1.97 for 2012.
Balance Sheet Strength
With a massive cash hoard of $442M ($5.44/sh) Diana boasts a current ratio of 9.4. Most companies with large current ratios are either start-ups without many fixed assets, or have disproportionate amounts of long-term debt. Diana owns 30 (28 delivered) vessels with a book value of $1.13B (market-adjusted value of $725M), and has total debt of $442M. The cash on hand cancels out the debt, and Diana actually has $61M net cash when advance payments and investments are added back.
Operating Cash Flows
Over the past quarter, DSX retuned approximately 43 cents ($1.70) annualized of operating cashflow. With expiring charters bound to lower rates, I project that DSX will return approximately $1.65 of cash flows for 2012. Most charters will not expire until 2013 or later, and the dry bulk market should begin to improve by late 2013.
Regardless of valuation ratio, including price/book, price/earnings, or price/OCF, Diana Shipping (DSX) is a great buy. A common ratio is P/E (ex-cash). In the shipping sector, price/earnings is often lower due to large depreciation expenses; however, with $5.44 of cash per share of DSX, with the Q1-12 results as a guide, DSX is currently trading at an ex-cash forward P/E of approximately 2.2. This is phenomenal, unheard of in the investment industry,
If you believe that the shipping industry will survive, it makes no sense to ignore Diana Shipping. Their Price/Book provides a solid floor which the Price/Earnings and Price/OCF gives current returns. This is the rare approach where a 'safe' approach also yields massive upside. When weaker shipping companies such as Excel Martime (NYSE:EXM), Freeseas (NASDAQ:FREE), Seanergy Maritime (NASDAQ:SHIP), and Genco (GNK) are forced to renegotiate financing or declare bankruptcy, Diana Shipping will emerge as the clear market leader and the proven operating cash flows will drive up the corresponding stock price.
Disclosure: I am long DSX, GNK.