The shipping industry is the backbone of the global trade–almost 90% of international trade is done through the industry. However, over the last few years the industry has suffered heavily due to the slowdown in the global economy and oversupply of vessels.
Most of the shipping giants experienced more than a 70% decline in their share price. However, a fall in price does not always generate an opportunity to invest, as sometimes the fall is permanent. Nonetheless, there remain some candidates that can prove to be attractive investment opportunities. In my opinion, DryShips Inc. (NASDAQ:DRYS), Diana Shipping Inc. (NYSE:DSX) and Navios Maritime Holdings Inc. (NYSE:NM) have the best chance to make a recovery.
Current situation
The shipping industry is one of the most volatile and vulnerable industries easily swayed by the currents of demand and supply. The economic slowdown in all of the developed economies meant a sharp decline in the demand for metals, one of the primary materials handled by the shipping companies. A drastic decline in the transportation of drybulk accompanied by a vast pool of suppliers resulted in low-level freight rates.
How these companies will perform
As I mentioned above, time-charter rates are expected to remain low over the next 12 months and management at DryShips Inc. (NASDAQ:DRYS)seems to agree with my opinion. DryShips Inc. (NASDAQ:DRYS)’ management expects the time-charter rates to remain low during 2013; as a result, there will not be much improvement for the company.
However, what distinguishes DryShips Inc. (NASDAQ:DRYS) from its counterparts is its positive cash flow from its drilling unit under the name of Ocean Rig UDW Inc (NASDAQ:ORIG). Ocean Rig recently reported a first-quarter profit and is in its expansive stage. It should also be kept in mind that impressive performance of Ocean Rig is currently overshadowed by the poor performance of the drybulk segment. When charter rates start to rise, the overall performance of the company will be much better.
Diana focuses on contracts
Diana Shipping Inc. (NYSE:DSX) has taken a slightly different approach. While DryShips Inc. (NASDAQ:DRYS) believes in divestitures, Diana has been more concerned with its shipping contracts. It recently issued charter contracts with Cargill and Clearlake. However, Diana relies on drybulk, which will result in a slow recovery for the company. Nonetheless, the company is getting ready to benefit from increased economic activity over the next 12 months.
Diana Shipping Inc. (NYSE:DSX) recently signed a term-loan facility with the Bank of China worth $30 million. Proceeds from the cash inflows will be used to finance acquisition cost of its new drybulk carriers. The management has focused more on operations rather than adjusting its balance sheet, thus giving it more operational flexibility.
Brand reputation
Navios Maritime Holdings Inc. (NYSE:NM) has its competitive strength rooted in low capital-cost structure and brand reputation. The company is vertically integrated, which gives it better control over operations resulting in operational efficiency. Its alliances with huge names like HSH Nordbank and Japanese ship owners provide the company with a strong financial backing.
When all the industry players took a more conservative approach to expansion, Navios Maritime Holdings Inc. (NYSE:NM) made a $130 million investment in its fleet operations. In the most recent earnings announcement, the company beat analyst estimates both on top and bottom line.
Risks faced by the participants
At the moment, developed economies are going through recession or extremely low-growth phases. As a result, the shipping industry has been performing poorly in the last few years. Furthermore, the “shale revolution” in the US meant a decline in the country’s oil imports. China has so far shown a disappointing response as the Chinese economy has also failed to maintain its high-growth figures. Lastly, the declining freight rates are not expected to pick up in the next 12 months, leaving the shipping companies in the worst possible state.
Conclusion
Patience is the key word while investing in the shipping companies. The stocks are at all-time lows and have the ability to yield attractive returns if investors are willing to be patient. I believe above mentioned companies are on the right path and we will see substantial increases in stock prices over the next 18-to-24 months. The global economy is making a slow but steady recovery and the pace should increase over the next two years. We are seeing a slight support in charter rates, which will be further improved once the economic recovery gathers pace.
Ishtiaq Ahmed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Should You Invest in Shipping Companies? originally appeared on Fool.com.
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