Dry bulk stocks have experienced material gains year-to-date. Both DryShips Inc. (NASDAQ:DRYS) and Diana Shipping Inc. (NYSE:DSX) are up by 18% and 37%, respectively, since the start of the year as compared to only a 15% rise in the S&P 500 Index. Many traders are betting that the dry bulk industry is on the verge of a turnaround.
For those who don’t know, the dry bulk industry was one of investors’ favorite industries back in 2008 when the demand for iron ore and coal was rising at enormous rates in China. However, the management teams at these dry-bulk companies made the worst decisions of their lives when they started ordering new vessels, believing that the rate of growth would remain as high for the next decade.
The result has been a disaster. The industry has been plagued by oversupply problems as China didn’t grow to fuel enough demand. DryShips Inc. (NASDAQ:DRYS), which traded at $120 in 2008, now trades just below the $2 mark! However, the question is if the recent rally is indicative of a turnaround in the industry. If yes, then it can easily be the most lucrative industry to invest in this year.
Is dry bulk the most lucrative industry to invest in this year?
Let’s see what the companies had to say in their recent earnings results.
DryShips Inc. (NASDAQ:DRYS) reported an adjusted 1Q loss of $0.10 per share, which was above consensus estimates of a loss per share of $0.11. The operating profit fell $15 million short of expectations, driven by higher tanker-voyage costs and lower-than-expected profits from Ocean Rig UDW Inc(NASDAQ:ORIG).
While addressing dry-bulk orderbook concerns, DryShips Inc. (NASDAQ:DRYS) announced the sale of its position in four new-build dry-bulk ships, which helped it to eliminate a net ~$149 million in upcoming capital expenditures, which were largely due in 2013. These transactions eliminate the bulk of the speculative orders in DryShips Inc. (NASDAQ:DRYS)’s fleet and should ease investors concerns regarding further capital commitments, which have now been reduced to ~$144 million over the next two years.
As far as liability restructuring is concerned, DryShips Inc. (NASDAQ:DRYS) has ~$1.1 billion in excess capital based on cash-on-hand of $192 million and un-pledged Ocean Rig UDW Inc(NASDAQ:ORIG) shares owned by DryShips at a current market value of ~$1.1 billion, netted against ship commitments of ~$144 million. This rough math suggests excess cash is sufficient to meet DryShips’ convertible notes of $700 million due in 2014.
However, given that the prolonged weakness in the dry-bulk market is likely to pressure cash-flow generation, DryShips is expected to use a portion of its excess capital to restructure its liabilities (lower amortization payments; cure covenant breaches). Given this dynamic, it seems that capital remains tight at DryShips.
A strong balance sheet for this company
Diana Shipping Inc. (NYSE:DSX) reported a 1Q earnings loss of $0.04 per share, which was slightly bigger than the consensus estimate calling for a $0.03 loss per share. Diana Shipping Inc. (NYSE:DSX) generated operating income of $22 million, compared to the expected loss of $6 million, primarily driven by higher revenue.
The company for a long time has stayed disciplined on fleet growth. While many dry-bulk operators grapple with rates remaining at or near cash cost, Diana Shipping Inc. (NYSE:DSX) is able to utilize its strong balance sheet to make ship acquisitions and investments.
Keeping with the company strategy of selective fleet growth, Diana Shipping Inc. (NYSE:DSX) announced signing a new-build order for two Newcastle 208,500 dead-weight-tons (DWT) ships scheduled for delivery in 2016. The long period to delivery offers Diana Shipping Inc. (NYSE:DSX) lexibility, giving the market several years to work through the current oversupply dynamics.
Hence, the company continues to survive and grow in a relatively tough operating environment.
How is the containership market doing?
When investors discuss the dry-bulk market, the topic of the containership industry doesn’t go neglected. The balance between demand and supply in the containership vertical has been more sustainable relative to other marine-transport segments like dry bulk. That said, containership operators continue to struggle, as net-fleet expansion is running slightly above demand keeping ship rates and values near tough levels.
Diana Containerships is the first company of that sort that comes to mind, especially after talking about Diana Shipping in detail. For those who don’t know, Diana Containerships is a former wholly-owned subsidiary of Diana Shipping. That ownership has now been reduced to only 10%.
Diana Containerships reported adjusted 1Q earnings per share $0.03, which was above the consensus estimates of $0.02. Operating income came up short ~$1 million of consensus, with lower revenue driving the majority of the variance.
The containership company has fresh capital for growth prospects up its sleeves. Through a new debt facility (via Diana Shipping), planned equity issuance and containership sales, Diana Containerships intends on raising nearly $120 million of capital. As containership markets remain challenged, the company took the prudent strategy of selling the three ships previously chartered at premium rates instead of continuing to operate the ships at a loss. However, existing shareholders are likely to suffer as returns generated on the ships are below original expectations.
The company pays a super dividend yield of 22%. Given the expected influx of capital, the Street does not see a risk to the quarterly dividend arising over the near term. The company is expected to deploy this capital over the next several quarters on fleet acquisitions and with expectations for a modestly improving containership market, a quarterly dividend payout of ~$0.20 to $0.25 per share is sustainable through 2014.
Final word
The marine transportation industry remains far from a solid revival given the current gloominess in the global markets. On a company-specific note, I remain neutral on DryShips. The company is addressing its supply problems well, but its liquidity remains tight as it will restructure its liabilities.
Diana Shipping is a good company in which to invest in such conditions given its solid balance sheet and adequate fleet size. Diana Containerships is well capitalized and provides investors with a long-term potential for value creation. However, the company’s near-term outlook is more challenging, as the company faces significant fleet renewals in a weak spot-rate environment.
The article Have We Seen the Bottom of the Dry Bulk Industry? originally appeared on Fool.com.
Zain Abbas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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