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Better Buy: DryShips vs. Eagle Bulk Shipping

Maxx Chatsko, The Motley Fool

Shipping stocks just can't seem to escape their history of futility. After finally gaining ground in 2017 thanks to a rebalancing of vessel capacity supply and demand, shipping stocks are struggling under the weight of the trade war between the United States and China. Apparently, Wall Street thinks slapping tariffs on everything from steel to soybeans poses a risk to ocean-going trade routes. Despite a temporary truce halting tariffs at 10% through February, things may get worse before they get better if shippers struggle to adapt to a global low-sulfur fuel standard that goes into effect in 2020.

The perpetual woes of the shipping industry always make it a candidate for bargain-hunting investors. That hypothesis hasn't exactly worked out recently, but maybe this time is different. Investors weighing their options might want to know: Is DryShips (NASDAQ: DRYS) or Eagle Bulk Shipping (NASDAQ: EGLE) the better stock to buy?

An aerial view of tankers at port.

Image source: Getty Images.

The case for DryShips

Shares of DryShips have gained 60% since the beginning of 2018. While the shipping industry's ongoing recovery has played a significant role in a strengthening business, the company has also made wise decisions managing its fleet. The business has sold dry bulk carriers while adding crude tankers and gas carriers. The latter have helped to improve the health of the business, thanks to booming gas trade globally and falling daily operating expenses per vessel. After announcing its intention to spin off its gas carrier business, the company wisely canceled those plans and instead decided to retain the awesome profit generation potential.

Consider how the fleet composition and daily average operating profit -- calculated as the time charter equivalent (TCE), a measure of the average daily charter rate, minus the daily average operating expense per vessel -- have improved this year from 2017. 

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Dry bulk vessels, average

18.2

21.8

(27%)

Dry bulk, average daily margin

$7,940

$2,472

221%

Crude tankers, average

5.1

4.0

25%

Crude tanks, average daily margin

$11,250

$3,169

255%

Gas carriers, average

4.0

1.2

233%

Gas carriers, average daily margin

$20,514

$12,538

64%

Data source: DryShips press release.

The all-around improvement allowed DryShips to post an operating income of $29.6 million on revenue of $136.8 million in the first nine months of 2018, compared with an operating loss of $27.9 million on revenue of just $58 million in the year-ago period. That year-over-year gain may not entirely erase the memory of multiple reverse stock splits in recent years, or years of awful management, but the business is on more solid footing. "More solid" is relative, though, and investors simply cannot overlook the fact that this has been a horrible investment.

A cargo ship at sea.

Image source: Getty Images.

The case for Eagle Bulk Shipping

Shares of Eagle Bulk Shipping have gained only 4% since the beginning of 2018. Similar to DryShips, the business has exploited the global recovery in average daily shipping rates. In the third quarter of 2018, the company reported TCE of nearly $11,300, a 30% increase from the year-ago period. 

However, Eagle Bulk Shipping's fleet consists only of ultramax and supramax bulk vessels, which typically capture lower margins than crude tankers or gas carriers. Through the first nine months of 2018, the business reported operating income of $24.1 million on revenue of $223 million. While that marked a sharp improvement from the year-ago performance headlined by an operating loss of $6.7 million, it only translates to an operating margin of 10.7%. By comparison, the more diverse fleet of DryShips earned an operating margin of 21.6%.

That said, the bulk shipping leader might have an ace up its sleeve. Eagle Bulk Shipping has decided to retrofit 37 of its 47 vessels with exhaust gas scrubbers before a new global fuel standard goes into effect on the first day of 2020. That's when shippers have to begin using fuel with the equivalent of just 0.5% sulfur content, compared with 3.5% today. The company is essentially betting that the cost of the scrubbers will allow the fleet to use significantly cheaper fuel (read: dirtier fuel) while still remaining in compliance with the rule, which really just regulates sulfur emissions. If it works, then the fleet could have a strategic advantage over peers scrambling to purchase cleaner fuels, such as diesel, which could fall victim to price spikes if refinery output lags demand.

A woman in a thinking pose in front of a chalkboard with question marks drawn on it.

Image source: Getty Images.

The better buy is...

In this head-to-head match-up, DryShips gets the nod thanks to its more diverse fleet. The addition of gas carriers provides further diversification to the bulk vessels and crude tankers, and with global gas trade booming, it also provides potential for upside. Eagle Bulk Shipping doesn't allow investors to tap into that important growth opportunity.

All of that said, individual investors would be better off avoiding the shipping industry altogether, especially given its downright awful track record characterized by destroying shareholder value. That's especially true for DryShips, which may not be able to pass off the "this time is different" argument with a straight face. Rather than searching the scrap heaps of the shipping industry, investors looking for cheap stocks that are actually worth owning in their portfolio should look elsewhere

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.