Dianna Shipping Inc: A Small-Cap With Big Potential

Aug. 8.12 | About: Diana Shipping, (DSX)

Edited By Kate Boehme

Diana Shipping Inc. (NYSE:DSX) is among the leading companies in the Shipping Transportation Industry. The company specializes in the operation of dry bulk vessels. As of July 24, 2012, its core fleet consisted of 28 dry bulk carriers, mainly employed on medium-length or long-term charters. The combined carrying capacity of the fleet is approximately 3.2 million metric tons of deadweight (DWT). Furthermore, three new-building Panamax vessels are expected to be delivered to the company before the fourth quarter of 2013.

Diana Shipping owns 14.4 percent of the outstanding shares of Diana Containerships Inc. (NASDAQ:DCIX) and currently owns and operates nine Panamax container vessels. Diana Shipping Inc. is based in Athens, Greece, and incorporated in the Marshall Islands. Since March 23, 2005, its shares have been traded on the NYSE market under the ticker DSX.


Diana Shipping is gradually building itself a small empire. It currently has a market cap of $580.93 million which, though not the highest, demonstrates how the company's conservative strategy has led to business expansion without overloading its credit exposure. By using just a portion of available financing, as well as encouraging progressive expansion, Diana Shipping has ensured a low debt level.

Among Diana's most significant competitors are DryShips (NASDAQ:DRYS), Eagle Bulk Shipping (NASDAQ:EGLE), Genco Shipping (NYSE:GNK), and Navios Maritime Holdings (NYSE:NM). Unlike these competitors, Diana has managed to maintain a sustainable level of debt. The total debt-to-equity ratio stands at 0.33. Meanwhile, the same ratio for DryShips, Eagle Bulk, Navios Maritime, and Genco stands at 1.079, 1.711, 0.432 and 1.235, respectively. Long-term debt data for Diana and its competitors demonstrates a similar situation. As of June 30, 2012, the long-term-to-total assets ratio for Diana was 0.24. At the same time, the ratio for DryShips, Genco Shipping and Eagle Bulk Shipping stood at 0.49, 0.54, and 0.61, respectively.

Moreover, Diana Shipping possesses one of the youngest fleets in the industry; the weighted average age of the vessels is approximately 5.9 years. Diana's strategy of buying new or used, but still young, vessels provides a number of benefits. Most notably, a younger fleet tends to lessen operational costs, particularly because the fleet is generally fitted with more fuel-efficient engines. In addition, younger fleets are typically more appealing to customers and guarantee higher cargo insurance rates.

Financial Performance

In the latest financial statement, for Q2 2012, Diana Shipping reported a net income of $17.4 million. Compared with the net income of $27.7 million reported for the same period in 2011, one can observe a substantial reduction. This drop in net income can be primarily attributed to a $7 billion decline in time charter revenue. However, the decline in income can also be partially attributed to the expanded fleet. Since July 2011, the Diana Shipping fleet has been enriched with five new vessels.

Furthermore, fleet utilization has improved and currently stands at 99.6 percent. Also, for the three-month period ending June 30, operating days increased by 448 compared with the same period last year. In addition, Diana Shipping announced recently that it has entered into charter contracts with Ultrabulk A/S. The contracts involve two Panamax dry bulk carriers, and are expected to commence in August 2012. Anticipated gross revenue for the minimum scheduled period of the charters is approximately $9.4 million.

As mentioned in a previous article, considering the sector's economic volatility, Diana has managed to maintain a remarkably healthy balance sheet. The past six months' total assets have noted an increase of $119.149 million. Also, the quick ratio at 9.20, current ratio of 9.40, and interest coverage of 19.20 all indicate strong financial performance.

The Stock

DSX is trading at $7, around the middle of its 52-week range of $5.8 to $10.19. Analyst sentiment appears to be positive about the stock. Average opinion is that DSX stock will outperform the market, to reach a target price of $9.81. Currently, the price-to book value ratio is 0.47, and the price-to-earnings ratio is 6.8, one of the cheapest among peers. Earnings yield stands at 14.88 percent, revealing signs of undervaluation at current levels. Meanwhile the EPS stands at $1.04. ROE and ROA metrics also remain well above industry levels. I strongly believe that the stock will support investor confidence in the medium term. Despite the risks, small-cap stocks like DSX have significant growth potential. Future expected earnings, and efficient management of the company, is very likely to provide positive returns.

Overall, Diana Shipping shows strong resistance to the influence of environmental turbulence. Despite a falling TCE (Time Charter Equivalent) and overcapacity issues within the sector, Diana Shipping manages to maintain a healthy financial position. The young fleet and acknowledged management efficiency are both key competitive advantages for this company. Analyst estimates for the full year expect that revenue levels will reach $217.9 million, with an EPS $0.71. A current profit margin of 29.86 percent suggests that DSX offers a safe bet. Even if the industry remains unsound, Diana Shipping is likely to emerge as a "small giant," presenting notable gains for investors.

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