Thanks to Gary, who contributed this comment on a post about the Baltic Dry Index a week ago -
“What great time to buy shipping stocks - before you know it demand will be back because pent-up demand will force products to ship. Stocks like Genco (GNK) and others will expode again.”
Not sure about the “explosion” you’re anticipating, Gary, but I’ve got to agree with you on this point - demand for the dry bulk shippers will be back. Dry bulk goods, like metals and grains, are the foundation of economic growth - and even as the world’s economy shrinks in the short term, its population (and corresponding demand for food, energy, and consumer products) continue to grow in the long term.
If only I had paid attention to Gary’s advice on Friday afternoon and pulled the trigger on a dry bulk shipper. I’ve been tracking DryShips (NYSE:DRYS) for a while now, and it’s ugly - down 96% in the last six months. That’s a huge number, but in line with what’s happened to the Baltic Dry Index (down 92% in the same period). Since the BDI measures the price of shipping dry bulk goods, as this price bottoms out, so do the prospective earnings of companies like DryShips.
But the BDI may finally have hit bottom. It’s been pretty much flat since November 3rd…and it really can’t go much lower, so its just a matter of time before the climb. So if you do believe in shipping stocks, which one to pick? Here’s some of the companies to watch:
Key Companies in the Dry Bulk Shipping Industry
Zeroing in on one of these companies - Genco Shipping (GNK) - you see the potential for explosive growth that has captivated investors like Gary. Revenues grew 235%, and net income almost 400%, between 2005 and 2008 as shipping rates reached incredible heights. The driver of the company’s growth has been Chinese demand, which spiked at 3 billion tons of dry bulk goods in 2007 - and that’s been part of the recent decline, too, as Chinese demand has dried up along with the global economic slowdown.
Let’s assume that Chinese demand will pick back up, and look at a few of the fundamentals of Genco’s stock and business. GNK earnings per share were $8.54, and P/E ratio was at 0.86 at market close on Friday. That’s eye-popping - but not so much as the $4.00 per share dividend, for a yield percentage of 54.6% according to Friday’s share value! You can be assured, though, that the dividend will decline this quarter since the stock price has rocketed south.
Genco’s current ratio (current assets to current liabilities) is over 7 - rock solid as a measurement of the company’s ability to meet short-term debt obligations. But total debt-to-equity is less rosy, well over 1, but that’s standard in an industry where the major fixed cost is ship-building, and companies often take on big debt obligations to grow in the short term. Also worrisome is Genco’s PEG ratio (a measure of potential for earnings growth) at just 0.11. This likely reflects the pain that the BDI and the industry as a whole have been feeling lately, and forecasts can change quickly if demand picks up again.
It’s just a snapshot - but I’ve got to think that the optimism surrounding these companies is pretty well grounded. At any rate, its a good time to take shots at undervalued stocks, while prices scrape bottom - and with strong fundamentals, dry bulk shipping is a gamble you’re unlikely to regret.
