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. ...