DryShips Inc. (DRYS), Diana Shipping Inc. (DSX): Is It Time To Get Back Into Shipping?

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Diana’s debt profile is good. The company’s free cash flow has allowed it to maintain net debt of below $50 million. In addition, the company actually had a net cash balance of $40 million in 2010 and $40 million during the first nine months of 2012. Furthermore, Diana has kept interest costs relatively low – amounting to about 5% of gross income for all three periods.

Most importantly of all, the company has been able to remain profitable, with gross income remaining above $50 million in the first nine months of 2012 – although this has declined about 66% since 2010.

Ship Finance International

Ship Finance International is the biggest company in this article by dead weight tonnage. Unfortunately, the company is also in the worst financial position. The chart above shows that the company has had a negative free cash flow between -$21 million and -$250 million every year since 2009. In fact, even though it is not shown on the chart, this poor performance has continued into 2012, when the company had a negative free cash flow of $81 million.

The negative free cash flow is attributable to several things. Firstly, the company has been increasing CAPEX spending; secondly, the company is achieving a much lower net income (depreciation is costing the company a large chunk of revenue); and thirdly, Ship Finance International is spending almost 100% of its income from operations on dividends.

The poor cash management that shows up in the company’s cash flows continues onto its balance sheet.

Ship Finance has a huge pile of debt, as shown above. The chart highlights the debt pile and staggering interest payments the company has to pay to prevent it from defaulting.

Shrinking revenues and rising CAPEX spending are damaging gross income, and as a result interest expenses currently account for a staggering 63% of the company’s gross income before income from affiliates.

However, the chart does make the situation look worse than it is. Ship Finance International has roughly $1.7 billion in net debt, which, when compared to other industries, is not a huge amount. That said, when this level of debt is compared to the company’s gross income, the situation looks worse. Ship Finance’s gross income was only $164 million for the year 2011, which in gearing terms gives the company a debt to EBITDA ratio of 8.3 times – the highest in this article and possibly the rest of the industry.

DryShips

The third and final shipping company is DryShips. DryShips is the second largest company by market cap in the group, behind Ship Finance. However, DryShip does have the highest revenue in the group as of 2011. During 2011 Dryships had revenues of $1 billion, Ship Finance had revenues of $300 million, and Diana had revenues of $250 million.

However, DryShips’ low market valuation and high revenue shows me that the market does not trust the company or believe in its future.

The market’s worries can immediately been seen in the company’s cash flows. DryShip’s free cash flow was negative $2 billion in 2011 and $500 million in 2010 as a result of increasing depreciation costs and reductions in working capital. In addition, just like Ship Finance, the company has been increasing CAPEX in the last two years.

Finally, cash flows from investing are also poor, even though the company has been issuing huge amounts of shares to try and raise additional funds.

DryShips’ balance sheet does not look any better. As of September 2012 DryShips’ net debt stood at $4 billion, four times the size of the company’s market capitalization.

Indeed, net debt is 7.1 times EBITDA – only slightly less than that of Ship Finance. Furthermore, as of September, DryShips’ debt interest accounted for 53% of the company’s gross income.

Conclusion

Out of these three companies, Diana Shipping is the only company that I could consider investing in. Both DryShips and Ship Finance have too much debt and very poor cash flows. These two companies are also continuing to spend cash on CAPEX when the shipping industry as a whole is cutting back on capital spending.

As I have shown above, Diana has the best balance sheet by far, and the company is producing a decent cash flow and subsequent return for shareholders.

Furthermore, I believe the rest of the market is also behind Diana, as currently the shares trade on the highest P/E multiple of this group.

Diana is trading on a P/B ratio of 0.5, signifying that the company’s share price is only valuing Diana at half of its net asset value. In addition, Diana has a current ratio of 8, highlighting the company’s relatively strong financial position.

So, if now is the time to get back into shipping, Diana is the stock to buy.

Data Source: Saxo Capital Markets, Marketwatch

The article Is It Time To Get Back Into Shipping? originally appeared on Fool.com.

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