Will These Companies Still be Around in 2 Years?
Robbert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
‘Will my company still be around in 2 years’ is a question every investor in dry bulk shipping should ask himself. The industry has had some misfortune with many new ships entering the market in the last few years while demand for those ships lags because of a global economic cool down. The nature of the industry causes a very dramatic decrease in shipping rates as the bottom is somewhere near the marginal costs of letting a ship for rent. Some shipping companies are in a better financial position than others. On the bright side the industry’s pork cycle can become an advantage. This means that when the economy recovers demand will soar past supply in no-time. But as an investor, you want your company to be around when that happens. Let’s take a look at some of the publicly traded dry bulk shippers.
Genco Shipping & Trading (NYSE: GNK)
Genco is in big trouble. The interest payments on its loans are 32% of revenue. Also, there is $48 million of debt to be repaid every quarter starting Q3 2012, ending Q2 2017. Net cash provided by operating activities was only $82 million in the second quarter of this year. That’s before interest and debt repayments. Most of Genco’s charter rates are directly linked to the respective index for the ship’s type. This means that it will feel the recent drop of the BDI in its Q3 earnings.
The interest costs are likely to remain high. The largest credit facility of GNK is based on LIBOR, a rate that’s very much likely to be reformed because of a recent scandal. The LIBOR is low now, but it could go up. Although I must say that Genco hedged a large part of the interest rate risk.
So what if Genco would arrive in a situation where it can’t find enough cash to repay its creditors. It will then have to sell ships, for which there is a painful market at the moment. On top of that, Genco’s fleet is relatively new, so it has accumulated little depreciation, which widens the gap between resale value and book value. I am sure that if GNK sells all of its assets today, the shareholders’ equity will be wiped out completely.
All that said, GNK’s next 2 years look very challenging to me.
Diana Shipping (NYSE: DSX)
In their analysis of Diana, many people point out that Diana is still profitable. They are right, but being in the sector it’s in, Diana shipping does not and cannot have a durable competitive advantage and will eventually be hurt by lower rates.
The reason Diana shipping is still profitable is that its ships are chartered for an extended period of time. One charter that has just expired will decrease the operating revenue and profits by roughly $3.7 million per quarter (21% of Q2 net income). The daily rate for that one vessel was $55,800 for the past 5 years and will be $13,000 for the next 2. And some more of those previously profitable charters will expire over the next 9 months. With the Baltic dry index being at record lows, this is a serious problem. Profits will drop a lot in the near future and won’t pick up as fast when the market recovers.
Another mistake many people make is that the unattractiveness of its peers makes Diana better. This is not the case. When another shipping company goes bankrupt, its ships will mostly be sold at a sub-book value price and re-used in the same market. It will certainly not hurt charter rates as new capital sees the opportunity to lease these cheaper ships to clients without losing money.
Yet Diana shipping is still trading at 47% of (supposed) book value and carries a 6.8 trailing P/E. Compare those figures to Bank of America (NYSE: BAC) which (nowadays) has stable earnings, trades at 38% of book value and has a forward P/E of 8.3. I wonder whether the shareholders of Diana shipping either are very optimistic people or have classified information about a major recovery.
On the bright side, this company will probably still be around in 2 years.
DryShips, Inc. (NASDAQ: DRYS)
This company is in even more trouble than Genco is. The Q1 2012 equity is at 39% of assets, EBIT is about $0 and interest costs are 98% of gross profits. I think these figures didn’t improve in the second quarter.
We don’t know when the Baltic dry index will recover, but it very is unlikely to happen tomorrow. So are the losses of this company. I could go on and on about this one, but I think you know enough.
The bottom line here is to be cautious when you invest in these companies as nothing is what it seems to be. Also, there is quite a big chance that at least one of the mentioned shipping companies will go bankrupt within the next two years.
Investor89 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America. 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.If you have questions about this post or the Fool’s blog network, click here for information.