Diana Shipping: the most undervalued dry bulk shipping company
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On June 7th, enterprise value to sales multiple (trailing twelve months) for Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), DryShips Inc. (DRYS) and Navios Maritime Partners LP (NMM) stood at 4.07, 4.83, 4.68 and 5.34, respectively. While EV/Sales (Enterprise Value/Sales) is often used to value companies with no earnings, analysts often use them to analyze companies with similar cost structure, but with differing revenue contracts due to contracts of different lengths.1
On the surface, Diana Shipping Inc. (DSX) appears to be most undervalued. This is likely because the market is mispricing the company’s fundamentals. The market often looks at “price” based valuation metrics, such as P/E (price to earnings), because they are popular. The disadvantage of price to earnings valuation multiple is that it does not consider the company’s balance sheet.
Suppose two companies both generate $1,000 each in annual revenue, with a market cap of $1,000. Company B, however, also has $1,000 in debt to operate its business. The total business purchase value for company A is $1,000, but $2,000 for company B. Company B is then more expensive than company A. Likewise, given Diana’s low debt and high cash levels, what appears to be cheap under EV/Sales may look adequately priced or expensive under Price to Sales.
As investors are forward looking, current price should reflect near-term fundamentals. Valuation for Diana fell from 2010 to mid-2012 because Diana had to recharter its ships out at rates that were lower than what they were before. But it has recovered since, as the majority of the company’s contracts are now priced at current market rates and the company is taking advantage of its strong financial position to purchase vessels at cheap prices in anticipation of a recovery in the dry bulk industry (see Ship Orders for articles on an early sign of recovery in the shipping industry).
Given that several valuable contracts will begin expiring in July for Safe Bulkers Inc. (SB) (visit Shipping Indexes for most up to date articles on contract maturities for more info), and the company is more expensive than Diana based on the EV/Sales, there is a high probability that Safe Bulkers Inc. (SB) will under-perform Diana over the next few months. Although DryShips Inc. (DRYS)’s revenue will also roll over, dry bulk shipping revenue made up less than 20% of the company’s revenue in 2012.
Investors looking to diversify investments in the shipping industry can do so through the Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide and does not hold positions in Safe Bulkers Inc. (SB) and Diana Shipping Inc. (DSX) as of June 11th.
Please note: this method does not capture Diana’s higher vessel operating expense. Low financial leverage is positive to the extent that management decides to unlock by increasing leverage. So far, we haven’t seen improvements in vessel operating expense and leverage; hence, the underperformance of Diana over the past few months–although low financial leverage reflects lower risk.
- Enterprise value is calculated by market cap + net debt + preferred shares + minority interest. ↩