Three Shipping Stocks to Consider for Industry Recovery
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since the subprime crisis, the shipping industry is under distress and is facing numerous challenges. The recent global economic meltdown and the prevalent oversupply in the sector are serious setbacks for investors. Most of the shipping giants are dealing with revenue losses due to low market demand. As a result, their debt is growing at a fast pace. Currently, most shipping companies are struggling to generate enough revenue to survive this turbulent environment. However, even at the worst times there are some great opportunities to be discovered. I think most shipping stocks are deeply undervalued. I particularly noticed three shipping stocks that are trading well below their historical highs.
DryShips (NASDAQ: DRYS)
DryShips used to be one of the biggest names in the shipping industry. Before the sub-prime crises, its stock was trading for as high as $120. However, bad news over global shipping activity combined with the Greece’s deficit situation had a devastating effect on the stock. Its market cap is slashed to less than $1 billion by the end of 2009. Since then, the stock has been mostly trading between the $2 - $3 range.
However, I think the market is completely ignoring DryShips’s business prospects and valuation metrics. Besides the shipping services, DryShips is also engaged in offshore drilling activities through its majority owned subsidiary, Ocean Rig (NASDAQ: ORIG). DryShips owns approximately 65% of Ocean Rig. As of market close Ocean Rig had a market cap of $2 billion which is almost twice the market cap of DryShips. I think this market anomaly cannot last long. Because, as 65% owner of the company, DryShips is entitled to a minimum market cap of $1.3 billion -- just from its Ocean Rig assets. However, with a market cap of less than $1 billion, DryShips is trading below its Ocean Rig ownership valuation. DryShips is also trading way below its book value. I think this stock can offer leveraged returns in case of a shipment sector recovery.
Navios Maritime Partners (NYSE: NMM)
Navios Maritime Partners is another one my favorite stocks. This shipping company has one of the best management teams in the industry. Thanks to the double-digit dividends, the stock is highly resistant to market downturns. In fact, it is one of the few shipping stocks that is trading above its pre-crises valuation. Of course the stock suffered from the world-wide crisis. However, since its dip of $4, it returned an eye-whopping 300% to its shareholders. Navios GP is the managing partner of Navios Maritime.
Another Navios-branded company is the Navios Maritime Holdings (NYSE: NM). Similar to the partnership, the company is engaged in seaborne shipping and logistics. This one also offers a substantial yield. The trailing yield of 6.7% is one of the highest in the industry. Navios Maritime Holdings is also trading below its book value. The company is able to generate enough cash to support its dividends. There is even room for dividend growth in the future.
Star Bulk Carriers (NASDAQ: SBLK)
Star Bulk Carriers is another one among my favorites. The company is a global maritime transportation provider of dry bulk commodities. Star Bulk owns a diverse and young fleet consisting of capesize, large handymax, supramax, and panamax vessels. Star Bulk's combined fleet carrying capacity is estimated at over 1 million deadweight tons. The average age of the fleet is approximately 10.3 years.
The stock is pretty volatile, and it has a 52-week trading range of $0.50 - $1.47. Currently, SBLK is trading at just $0.58, which is at the lower end of its 52-week trading range. With a price-to-sales ratio of 0.39 and a price-to-book value ratio of 0.09, the stock is trading at bargain-basement levels. Moreover, Star Bulk is considered to be one of the top-dividend players within the industry. The company has a positive annual dividend yield of 11.80 percent. SBLK might seem to be a risky investment, mainly because of the negative investor sentiment towards dry bulk shipping stocks. Nevertheless, considering the current harsh environment, Star Bulk is among the better-positioned companies in the industry. The company has a gross margin of 45.60 percent, which is above the industry's same variable. Moreover, debt figures for some of the company's major peers are much higher. For example, total debt-to-equity ratio for DryShips, and Navios Maritime Holdings stand at 1.39, and 1.36, respectively. With a debt to equity ratio of 0.57, Star Bulk can be considered as a relatively safer stock compared to better-known peers.
The subprime crisis had its biggest toll on the shipping industry. While most financial stocks already recovered and even surpassed their pre-crises valuations, some shipping stocks are trading substantially below their historical valuations.
Also, since 2009, the Baltic Dry Shipping Index continually decreased until it stabilized earlier this year. The index started to move higher recently, suggesting that a recovery might be on the horizon. If this index starts rising back to its pre-crises levels, that would be a strong catalyst for shipping stocks. Therefore, I recommend keeping an eye on the above-discussed shipping stocks.
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