Stay Away from the Bulk Shippers… for Now
Posted on: November 9, 2008 - Email Article - Printable Version
If you have been an active investor in the markets, chances are you have come across the insane volatility surrounding the bulk shipping companies of the world. As an industrial-minded investor myself, it’s hard to look away when you see a fundamentally strong company 60% off its highs, and offering a 25% dividend yield (or more!). It might come as a bit of a shock when I say: stay away from the bulk shippers!
Expect Third Quarter Earnings to be a Mixed Bag
Most of the (formerly) big shipping companies release earnings later this month, and I fully expect there to be some positives. However, these are companies that just don’t pop on good tidings… and playing a bulk shipper could perhaps be one of the worst ideas for the defensive trader. From a second quarter that had many big names like Diana Shipping [DSX: 14.76, +0.28 (+1.93%)] producing doubles in net income and revenues year over year, things simply can’t look as bright heading forward.
The shipping industry, particularly bulk shippers, are driven by volume. In a recessionary environment… you need to almost completely disregard the constant bickering among corporate CEOs claiming that fleet utilization is still up around 100%. The bottom line is: companies like DryShips [DRYS: 5.95, +0.03 (+0.51%)] and Genko [GNK: 21.63, -0.02 (-0.09%)] are not in a very safe spot as the global economy weakens and people are, when it gets down to it, shipping less goods and materials.
The Baltic Dry Index
In this market, a lot of emphasis is placed on the Baltic Dry Index for tracking the actual dry bulk shipping rates over time. This is a daily survey that is literally given out to Baltic brokers every morning, asking how much it would cost for them to ship various raw materials across different routes. A bit rudimentary, but it seems to get the job done. In particular, this Baltic Dry Index follows commodities like coal, iron ore and grain.
Let’s have a look at how the 5-year chart looks:
Obviously, things haven’t been too pretty as of late. The shippers were all over the news this summer, as things collapsed and the shippers took off along with energy, a sector they are highly correlated to for obvious reasons (see raw materials the BDI is tracking). Does anyone really expect a massive rebound in energy? Not especially. Following along with this thesis, the shippers are actually getting hit 2x on bad commodity ties and poor volume in a deteriorating macroeconomic environment.
The Dividend Yield May be a Trap
After reading through a write up from Charles Petredis entitled “What’s Next For The Bulk Shippers?“, I can’t help but question how he is certain that dividends will stay where they are. While I can’t throw a hard-hitting statistic at you on investor sentiment toward dividends (nobody actually measures this), I believe that it is fairly safe to say that somewhere around 85% of investors don’t consider dividend cuts an actual possibility when placing bets in the market. But when you look at a bulk shipping company like Frontline [FRO: 31.19, +0.63 (+2.06%)], currently offering a 31.20% dividend yield, or Eagle Bulk [EGLE: 5.47, -0.16 (-2.84%)], with an 18.20% yield, this is not something that is sustainable in the real world.
These companies aren’t REITs, get real!
As a slew of downgrades have come in, many multi-billion dollar companies are now multi-million dollar companies. Don’t expect a company that claims to be re-investing in new carriers, expanding their contracts and reinvesting in efficiency improvements to hold their dividend up high enough to give you those kinds of gains forever. It is much safer to stick to a shipper that understands reality, and has a dividend closer to 5%. Any shipper with a yield over 10%… I just don’t trust. Be fearful of a dividend cut that could wreck havoc on your portfolio.
Solid Companies, Stuck in the Mud
Before you consider me the arch-enemy of all things shipping, understand that I actually adore the business model driving these transportation companies. Heck, I almost bought up a few long positions in my two favorite names (DryShips and Genko) when things looked like they couldn’t get worse about a month ago. Lo and behold, things got worse.
If you are an experienced (and aggressively-focused) investor that can handle the risk, I wouldn’t have a horrendous objection to investing at these ultra-low levels. Let’s face it, many of these companies have substantial cash positions that they have been using to expand their fleets and isolate themselves from a bad macro environment. However, never underestimate the trend in volumes… which may have a considerable amount of room to fall, especially in the short term (Q408 and Q109).
I’d love to see how things look after earnings roll through, but before then I cannot advise any activity in the sector, which is clearly “hands off” at this point in time. Stay cautious, and keep your eyes on the future prospects of this high-flying industry… but don’t let a bulk shipper sink your portfolio.
-Jim Regan
Disclosure: None.
The Following Stocks Were Mentioned In This Article: DRYS, DSX, EGLE, FRO, GNK
Comments
As someone on the Yahoo Dryships Message Board put thinks, “The 5th part of the Puzzle is IN. http://www.bloomberg.com/apps/news?pid=20601087&sid=augL9_cumtA4&refer=home
With China jumping into the Stimulus bandwagon things are going to turn around sooner than later. All Four corners of this globe are greased, which should set in motion things that are going to come on line much faster than that of the past slowdowns or Rescissions. And then we introduce “Technology” into the mix, which is 100 times better and faster than 20 Years ago and things will be better in months, rather than years.
Good Post. Thank you for your insight.
I think one way you can gain exposure to the sector for considerably less risk is SSW (Seaspan). They build & lease the ships and have long-term contracts that won’t be as affected by the volatility in the BDI.
Interesting concept DVDs Anonymous. I just had a look at the company and you are right that they are a lot less tracked to the Baltic Dry Index, which seems to be a big problems for these other shippers. It looks like they operate out of Hong Kong, which could have a positive impact in ensuring the long-term dominance of the company… especially now that we know the Chinese are intent on re-stimulating their economy with the recent half-trillion “bailout” plan.
I’ll have a closer look into SSW. One thing I am worried about is their dividend yield, which could definitely be on the chopping block. Also, they have a negative quarter forecasted in 2009, and seem to trade at an insane premium against their private competitors. At any rate, it’s an interesting play and I’ll be considering them in the future.
You contradict Buffet and anyday I will take Buffet’s advice than a 20 yr old kid.
DRYS is down 90% from its high. Revenues and Profits still on track for 2009. Just the Drilling business is worth $30/share and stock is at $13. The value of stock by any standards should be at least $55 now.
I WILL BUY WHEN BLOOD IS IN THE MARKET. IF U TRUST URSELF MORE THAN THE PROS,SHORT THE STOCK AND MAYBE U WILL GET LUCKY.
I’m not sure that writing in all capital letters makes you correct. A normal “20 year old kid” I’m sure would just look at a stock that is down and tell you to buy it. It takes more conviction to wait for things to actually turn around then to just buy everything that falls off the map.
Make no mistake about it… the shippers all collapsed for a reason. Things haven’t changed (to the positive) fundamentally. Until this happens, I don’t advise anyone concerned with risk to buy into this industry.
Well the research and knowledge you have about the industry is admirable for someone your age. You definitely have a bright future.
I am just tired of hearing negative sentiments that are instilling more fear in the market and if this goes on we will end up like Japan’s stock market which never recovered.I hope rationalism and support from media returns to market soon.
Just to clarify: my view on the industry is “cautious,” not “negative.” It’s going to make money in the long run, not much of a doubt there. I am simply advising against jumping right back into these beaten names simply because they are beaten.
Thanks for your comments!
Would you agree with me that the Chinese Government announcement is very good news for reviving ecomomic ativity not just in that BRIC ecomomy but across the globe?
With $600 billion targeted at housing, transport and infrastructure, surely we will see a pick up in demand for bulk shipping, with iron ore, copper and aluminium, among the base metals needed for these major projects.
And with leaders of the major ecomomies meeting in New York on November 15 to discss a Bretton Woods 2 type of architecture, things do seem to be going in the right direction.
Anyone can look at an index and see that its down; that’s not news. More important is why is it down and how long can it be expected to be so. Most reporters/analyst are lazy and keep repeating the obvious or same story. The fact is pure demand hasn’t dissipated, rather capital to facilitate the transaction has dried up temporarily , since letters of credits are not being issued or honored.
The extent to which the credit has dried up is definitely a long-term trend… and is something that nobody managing the actual shipping companies expects to change any time before mid-2009. I understand that people get frustrated when people publish negative news items, but saying that “demand hasn’t dissipated” is just plain incorrect.
This from Investopedia.com (Nov. 20th): “As demand from emerging market economies, such as China and India, has wilted for commodities ranging from copper to coal to iron ore to zinc, shares in the world’s top dry bulk shippers have followed suit. Unfortunately, recent demand trends show a pervasively downward trend and when the trend dissipates, is anyone’s guess.”
I’m a little puzzled here. Lets use GNK as an example. According to what I’m seeing, consensus estimates is for 2009 EPS to be in the $4.00 to $5.50 range. They have a pretty good track record of beating estimates, a strong balance sheet and it sure seems like the massive stimulus packages are going to have a very positive impact on commodity consumption.
If you’re purely technical trader, I can understand the reservations just because the sector looks wonky but if you are looking for a solid value play, this seems like a great time to buy.
I’m just wondering what I’m missing.
Value plays have been, in general, terrible investments throughout 2008. I don’t expect this story to be much different in the first half of 2009. Genko shipping has absolutely no catalysts other than valuation… and that typically spells bad news.
GNK in particular is expected to grow negatively all of next year, so I would have a hard time considering them on a 12-month horizon. All things considered, I see your point now that we are two solid months after the post date of this article. I feel that I may pick up some dry bulk shippers on the cheap once February comes… but this will really be a value play and nothing else.
I don’t understand why Genko Shipping trading more than $19, the other competitors with higher income yield, i.e. better fundamentals than Genko trading at a lower price.
Can anybody explain to me why Genko is over valued at $19. There are other good shipping stocks with good value but being overlookedi,i.e NM, HRZ. These two better in fundamentals than Genko.