High Profits at Low Prices
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A "perfect storm" of hostile forces flooded the shipping sector during The Great Recession and its aftermath, taking down the share prices of companies in the industry. This is an excellent opportunity for investors to buy low those shipping companies with the potential for high returns. Still floating that are profitable with low debts and attractive valuations are Diana Container Ships (NASDAQ: DCIX), Box Ships (NYSE: TEU), Knightsbridge Tankers (NASDAQ: VLCCF), EuroSeas Ltd (NASDAQ: ESEA), and Diana Shipping (NYSE: DSX).
Before The Great Recession, shipping companies overbuilt to meet anticipated rising demand for the future. For this, huge amounts of debt were incurred. But the slowdown in the global economy greatly reduced the demand for shipping just as the supply was soaring. This "perfect storm" led to falling shipping rates from many more vessels competing for much less business. Making it all the more "perfect" was the crippling debt load now anchoring down so many shipping companies.
Just making a profit has become very difficult in shipping. But Diana Containerships has a profit margin of 17.33%, which is very strong for any industry, least of all shipping at this stage. Knightsbridge Tankers tops that, however, with a profit margin of 32.71%. Even higher than that is the 35.20% profit margin for Diana Shipping. Box Ships has a profit margin of 3.30%. For EuroSeas, Ltd, the profit margin is at 1.82%.
Too much debt can distort the profit margin of a company, in addition to swamping it in adverse market conditions. Diana Shipping has a modest debt-to-equity ratio of only 0.33. Each dollar of equity for the shareholders required only 33 cents of borrowing, which is very attractive for investors. For EuroSeas Ltd, the debt-to-equity ratio in 0.35. The debt-to-equity ratio for Box Ships is 0.39. At Knightsbridge Tankers, the debt-to-equity ratio is 0.43. Diana Containerships has a debt-to-equity ratio of 0.45. All of those debt-to-equity ratios are admirable based on comparisons with other shippers in the industry.
As the shipping sector is currently disfavored by investors, companies are trading at very compelling valuations. For value investing, it does not get much better than EuroSeas Shipping Ltd. selling with the price-to-book ratio being only 0.18%. That means that investors can buy the assets at more than an 80% discount to their stated book value based on the share price. Diana Shipping, the price-to-book ratio is 0.43. Box Ships, the price-to-book ratio is 0.56. The price-to-book ratio for Knightsbridge Tankers is 0.58. At Diana Container Shipping, the price-to-book ratio is 0.71.
These companies have such low share prices that have fallen so much that investors can assemble a portfolio at a very low cost, particularly when compared to the highs of recent years. Over $45 a share in 2005, Knightsbridge Tankers is now going for around $8.60. Selling for more than $40 a share in 2007, Diana Shipping is now in the $7.20 range. Diana Containerships is selling for around $6.15 a share, down from about $15 in 2011. At about $6.80, Box Ships is well below the $11.50 it was trading at in 2011. Almost $20 a share in 2007, EuroAsia is, at present, just under $1.25.
The upside for each of these companies is obvious. These are the survivors of the industry. Not only did these shippers not go under during The Great Recession, all are still profitable. In addition, each managed to float above the troubled waters of the roiling global economy without taking on a great deal of debt. That is a tribute to the management of the company and the soundness of the business model.
Based on the Baltic Dry Index, which measures costs to transport dry goods such as coal and lumber, the global economy is much stronger. Now around 812, the Baltic Dry Index fell from an all time high of 11,793 in May 2008 to its lowest figure ever recorded of just 663 in December 2008. When Europe recovers from the recession and China rebounds, shipping will rise again. Companies such as Diana Containerships, Box Ships, Euroseas Ltd, Knightsbridge Tankers and Diana Shipping that weathered the worst of The Great Recession will deliver solid returns to the shareholders.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.