For a while now I have wanted to invest in a shipping company to play the global economic recovery. I have done some research on individual shipping firms in the past, but never completed a study of the whole industry to find the most undervalued company with the best prospects.
However, as I have only ever done some research on individual shipping companies, I did not know that the rest of the sector was so big! Screening on Finviz for shipping companies returned 47 results – only nine of which are US based companies. The rest are based in Greece or Bermuda for tax reasons.
So, to whittle this group down, I looked for the most active stocks with the highest market caps. The one with highest average daily volume is DryShips Inc. (NASDAQ:DRYS). The next most active stock with the largest market capitalization is Ship Finance International Limited (NYSE:SFL).
Tidewater Inc. (NYSE:TDW) is next in the list, but this company is more of an oil services company than a pure shipping company, so I am going to leave it out of this analysis for now. Instead, I am going to look at Diana Shipping Inc. (NYSE:DSX) as my last choice.
So how do these companies compare? First, here is a quick overview:
DryShips operates container ships, tankers, ore carriers, and through its subsidiary operates nine ultra-deep-water hydrocarbon drilling units. Dryships has the smallest fleet by tonnage in the group. However, the company does have partially own Ocean Rig UDW Inc., an oilfield services company.
The total fleet is comprised of 44 dry bulk carriers, 5 very large ore carriers, 12 tankers, and through its subsidiary, 2 ultra-deep water submersibles and seven ultra-deep water drill ships – that’s a total capacity 1.6 million dead weight tons.
Ship Finance International
Ship Finance, through its subsidiaries, is responsible for a fleet of vessels across the world and is also involved in the charter, purchase and sale of related marine assets.
The company’s total fleet is comprised of 25 crude oil tankers, 2 chemical tankers, 5 ore vessels, 11 dry bulk, 15 container, 6 offshore supply, 4 jack up and ultra-deep water rigs – that’s a total capacity 10.5 million dead weight tons.
Unlike Ship Finance and DryShips, Diana has no direct exposure to the oil industry. However, the company does have a large exposure to the commodities market, which could be both positive and negative for the company.
The fleet is made up of 29 dry bulk carriers, for a total capacity 3.2 million dead weight tons.
So that’s the introduction over with–now let’s get down to the business of financial analysis.
The shipping industry has undoubtedly had a rough time over the past few years. The Baltic Dry Index, a key barometer for the health of the shipping industry, is nearly at lows that were last seen in 2008. Furthermore, during the last five years the index has not even come close to reaching the highs seen before its drop in 2008.
So, with the Baltic Dry remaining at its lows, how have these companies faired over the past three years?
Rather than relying on EPS or revenues, I am looking at company cash flows, as in my opinion they usually reveal much more about a company.
Diana Shipping’s cash flow looks healthy at first glance. The company has sustained its free cash flow at $150 million a year over the past three years, and roughly 60% of this has been translated into free cash flow. Free cash flow totaled $95 million during 2011, which continued throughout the majority of 2012.
However, Diana had to grapple with higher than expected CAPEX costs in 2010, which pulled the free cash flow into the negative for that year. Overall, Diana continues to generate a sustainable and positive free cash flow.
The chart below shows the company’s debt profile.