Frank Voisin is a value investor and independent analyst whose site, Frankly Speaking, contains Frank’s investment theses as well as educational material to help investors avoid value traps. Subscribe to Frank’s feed here.
Diana Shipping Inc (NYSE:DSX) is a global provider of shipping transportation services for dry bulk cargo (commodities like iron ore, coal, and grain).
I found DSX when I saw another dry bulk shipper, Genco Shipping & Trading Limited (NYSE:GNK), was hitting 52 week lows. When I looked into GNK, it was apparent that the industry as a whole is struggling with low rates (as shown on the Baltic Dry Index, which tracks worldwide shipping prices of various dry bulk cargoes) in the face of an oversupply of ships. The oversupply is the result of the lag time in between ordering a new ship and receiving the ship. Exuberance characterized the industry in 2006 – 2008 (when the BDI was above 11,000 – for reference it is now around 1,400) and prompted a large increase in ship orders. During the recession, these ships were finished and put into service around the time demand was declining. The result was a massive 95% fall in BDI rates in 2008/2009. Though rates have since recovered slightly, they are still below long-term averages.
When looking at an industry with short-term supply/demand imbalances, I like to consider which companies are best positioned to outlast the short-term problems and succeed where others will not. In the dry bulk shipping industry, DSX stands out from the crowd. I looked at the top twenty dry bulk shippers by market capitalization and found that DSX has the second lowest leverage in the industry, the second highest 5-year average ROE, and the second highest net profit margin (and no, there isn’t a single company that was #1 in all of those categories). Moreover, while the company is currently trading around $12.00/share but has just under $4/share in cash, so on a TTM basis, P/E ex-cash is just over 5x. Can you find companies with a lower P/E? Yes, but they have significantly more debt, lower ROE, and lower net profit margins.
Additionally, DSX generates an extremely high level of free cash flow, the consequence of low debt, no income tax, and low maintenance capex (the result of having one of the youngest fleets in the industry at just 4.8 years as compared to an average worldwide age of 13 years).
Moreover, DSX is trading just 11% above its 52 week low, the consequence of recently spinning off its containership business, which operated two containerships that were losing money. Since I base my valuation on earnings power, I like that the company has rid itself of a money-losing operation, even if that means it lost the assets without getting any cash value for them.
On an EV/EBITDA basis (which is arguably more appropriate in this industry given the wild disparities in capital structures), we see that DSX’s multiple is just 5.77, as compared to the industry average of 8.76. Arguably, DSX should be above the industry average given its superior performance, but going with the 8.76 figure, we see that DSX would be valued around $17.30, 44% above the current price.
I like to confirm an estimated intrinsic value with a few different metrics, so I also computed the company’s EPV as a no-growth perpetuity. Using 8-year average expense ratios which were generally higher than the expenses the company is currently operating at, and found a value per share of $16. Also, I used revenue below last year’s revenue, despite the fact that the company now has four extra ships. I think this figure is low due to the conservatism of the margins and the revenue used, but if we split the difference with the EV/EBITDA multiple, we get a value of $16.65, or 39% higher than today’s price.
Summary: DSX’s operating metrics, combined with its conservative balance sheet, ensure that it will be able to outlast temporarily low rates. I believe there is a sufficient margin of safety to warrant a purchase as these levels.
Author Disclosure: Long DSX.
Read more: Diana Shipping Inc: Industry’s Best in Class Poised for Success | Frankly Speaking http://www.frankvoisin.com/2011/02/25/diana-shipping-inc-industrys-best-in-class-poised-for-success/#ixzz1FMW4ozcW
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