DRY-BULK-SHIPPING STOCKS HIT SOME ROUGH seas late last year, but barring a U.S. recession and global slowdown, they should be in for smoother sailing in 2008.
While companies across the sector are poised to benefit, two standouts are Diana Shipping and Genco Shipping & Trading. Both shippers will acquire new vessels and will have the opportunity to lock in higher contract rates this year. That would provide the company and investors with reduced earnings uncertainty despite an iffy economic outlook.
After roughly tripling from their lows in early 2007 to their peaks at the end of October, Diana and Genco have each fallen about 30%. That's about in line with the 20%-40% retracement by other dry-bulk shippers when investors began to worry that slowing growth in the U.S. might put a damper on global trade.
But the drop in the sector has made for more reasonable valuations, especially if the economic jitters are overdone. Plus, Diana and Genco also offer some of the higher dividend yields among peers at 7.4% and 4.8%, respectively.
Chip Hanlon, president of Delta Global Advisors, says, "If a recession doesn't happen, this correction was overdone and these [dry-bulk stocks] are expected to rally."
Demand for hauling boatloads of iron ore, coal and agricultural products to China and other markets continues to be robust. A limited supply of new shipping capacity should buoy day rates around record highs.
Analysts expect these new charters to drive double-digit-earnings growth with similar stock gains. Meanwhile, these stocks trade at relatively modest multiples: Diana trades at 10.4 times forecast earnings while Genco fetches only eight times expected earnings.
These valuations look compelling considering the spot day rates on the Baltic Dry Index -- a key barometer of shipping -- are still strong despite coming off recent highs.
Scott Burk, a Bear Stearns shipping analyst, says dry-bulk-shipping stocks "have been unfairly beaten up" and have "significantly underperformed what day [shipping] rates have done in the last few months."
He has Buy ratings across the industry, but favors Genco slightly because it has five vessels up for contract renewals in the first half of this year versus four at Diana in the same time span. Burk expects the pair to "recharter at very attractive levels" this year, with further potential upside in 2009 should day rates remain strong.
Genco has 22 vessels and will add another 11 through the third quarter of 2009 for total-shipping capacity of 2.7 million deadweight tonnage. The company locks in 75% of its capacity in charters with the rest of the capacity catering to the spot market.
Regarding the short-term spot rates, Genco Chief Financial Officer John C. Wobensmith says that "the short-term volatility on the downside doesn't affect our business model because 75% of our revenue for 2008 is locked in."
Diana has 18 dry-bulk carriers with more than two million in deadweight tonnage.