Don't Ignore Shipping's Headwinds

Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The shipping industry faces a number of challenging headwinds. Quicker turnaround times make on-shoring an attractive proposition. Chinese wages continue to rise and it is expected that in 2015 productivity adjusted Mexican wages will be lower than Chinese wages. If a significant number of factories are moved to Mexico or the United States then this would be negative factor for pacific trade volumes. Geopolitical conflicts should not be ignored; the rise of China and the slow erosion of U.S. hegemonic power will increase the level of conflict in the South China Sea. A number of shipping lanes pass through this area which makes the situation particularly worrying. At the same time China continues to face economic and demographic challenges which are not positive for growth. 

In addition the short term situation is filled with difficulties. The chart below shows how the supply demand in-balance will not be resolved quickly. Scrapping vessels and accepting losses is costly and companies prefer to charter vessels and earn some cash flow wherever possible. 

[The AME Group]

Shippers are worthy investments even in the midst of the large risk premium, which they deserve. Shipping is an integral activity in the world economy and it remains a cost effective way to transport goods and materials. DryShips (NASDAQ: DRYS) has a total debt to equity ratio of 1.5, which is more than their competitors. In 2014 the company has $832 million in debt due for repayment while 2014's charter coverage is only 22%. DryShips' stake in the drilling company, Ocean Rig, is an important fallback. At current prices DryShips trades at a price to sales ratio of .71, which is comparable to other money losing shippers. This company is not a screaming buy, but their interest in Ocean Rig makes DryShips' future a little more secure. 

Navios Maritime Holdings owns a number of handysize, ultra handymax, panamax, and capsize vessels. They have a debt to total equity ratio of 1.34 and the next major debt maturation of $510 million is not until 2017. Even though this company focuses on long term charters to try and stabilize cash flow, they are expected to post a loss in 2013. After a recent insurance restructuring the percent of days charted in 2014 is only 11%. Navios's EBIT margin of 20.9% and ROA of 1.1% are much better than DryShips' ROA of -1.4% and EBIT margin of 5.4%. Looking at 2013 the picture is not as clear as DryShips is expected to break even on an EPS basis while Navios is expected to post a loss of $.41 per share in 2013.

Genco Shipping & Trading Limited (NYSE: GNK) operates 9 capesize, 8 panamax, 17 supramax, 6 handymax, and 13 handysize vessels. Their total debt to equity ratio of 1.37 is considerable to that of their competitors, though their future debt situation is starting to look questionable. In August of 2012 they entered into an agreement to defer some scheduled debt payments until 2014. Genco is expected to lose $2.49 per share in 2013, which will not help their cash position. They already trade at a price to book ratio of .15 which is the lowest of any of the companies mentioned here. Given the instability in the global economy and the questionable debt situation, Genco appears too risky for the time being. 

Including 3 future vessels Diana Shipping (NYSE: DSX) owns 33 different ships with one of the strongest balance sheets in the industry. They have a total debt to equity ratio of .33 and a quick ratio of 7.8. Diana's fleet is well booked until the end of 2013, but only 4 vessels are fully booked until the end of 2014. Diana Shipping has a strong ROA of 4% and ROI of 4.2%. This company is an attractive investment even though their estimated EPS for 2013 is a loss of $.09. 

^BDIY data by YCharts

Conclusion

The drybulk shipping industry has a couple of years before it comes out of its doldrums. The oversupply of tonnage must be dealt with and it is not clear how many ships will be scrapped in the coming 36 months. Even in the midst of low day rates and a large number of expiring contracts some companies have a more positive outlook.  Diana's low debt load is a definite strength and will help the company to deal with losses in the coming years. DryShips' stake in Ocean Rig helps to even out the losses from drybulk shipping. The volatile nature of the shipping industry makes these stocks a great place to find future profits for those who tread carefully.


MrCanadian1 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure