European debt, slowing Chinese demand and an oversupply of cargo ships has crippled the dry shipping business. The boom/bust 2008 and 2009 years led to terrible contract pricing for shipping companies. Add to that the new builds companies started before the financial crisis of 2009 and you have a terrible capacity glut that gets worse with every bankruptcy in the industry.
In this environment one dry goods shipper stands out as profitable, asset heavy, and cash - debts equal to zero: Diana Shipping (NYSE:DSX). As the market has sold off this week DSX ducked under a 600 million market cap. Looking at cargo ship prices from Shipping Herald news, DSX's fleet appears to be undervalued by 20 percent. That calculation is easy thanks to the large cash position DSX maintains. 11 post-Panamax, Newcastlemax and Capesize ships worth about 34 million each and 17 Panamax ships worth a hair under 22 million.
All of those 28 ships are under contract. With 15 contracts expiring before January 2014 revenues for DSX are likely to decline well into that year as contract rates face continued pressure. It's easy to stay comfortable with that outlook considering DSX has a trailing 12 month EPS number of 1.16 heading into an end of the year seasonal peak.
Even if we accept the TTM 1.16 as a 2012 EPS estimate of 1.16 we see a decrease in EPS of about 7 percent a year over the last five years. Compared to the better known DryShips (NASDAQ:DRYS), which has only had two positive EPS numbers over the same five years, we can see that management at DSX is doing very well in a terrible environment.
A declining EPS number is still a bad thing, but the same management team that turned a profit in these lean times and didn't overextend themselves in 2008 sees a turnaround by the fourth quarter of 2014. Even assuming a continued decline in earning through that period DSX looks under valued. It seems likely Diana Shipping will continue to eke out a profit until that turnaround.
The cash the company saved through conservative management and elimination of dividend has allowed them to be flexible now as ship build and acquisition prices continue to drop. With a fleet of 30 ships, including two not in operation, DSX can afford to price contracts aggressively, adding further pressure on more highly leveraged dry shippers.
I added shares on Wednesday and will look to buy more should I get another 10% discount. If you've got a craving to try something different, DSX might be the company you've been looking for.
Disclosure: I am long DSX.