Finding True Value In Drybulk Shipping

By Gregory S. Davis | August 11, 2008 AAA

It's common knowledge that U.S. consumption is a driving force for the goods imported from nations like China, Mexico and Canada, but far less attention is given to the fact that U.S. exports continue to grow, particularly to this year's Olympic host China. Given the growing trade figures between raw materials suppliers, manufactures and consumers, the shipping lanes around the world should continue to be filled with cargo in the belly of drybulk shippers. In this article I'll explore how a couple statistics and some fact finding make choosing a bulk shipper much easier.

General Comparison
New York based Eagle Bulk Shipping (Nasdaq:EGLE) transports dry bulk cargo including iron ore, coal, grain, cement and fertilizer through its subsidiaries. Eagle owns and operates 15 Supramax class vessels and three additional Handymax dry bulk vessels. With 35 new vessels on order in Japan and China, Eagle is expecting a total of 53 vessels by 2012 for total shipping capacity of 2.9 million dwt (deadweight tons).

Greece based DryShips (Nasdaq:DRYS) is a holding company which also carries the same drybulk commodities through its subsidiaries as Eagle, but its capacity is much greater. Its fleet of 46 dry bulk carriers includes five Capesize, 31 Panamax and two Supermax vessels, giving it a current capacity of 4.2 million dwt. Dryships also has eight new carries on order.

Dividends

Shipping company stocks are traditionally known for having high dividend yields. Eagle carries on the tradition with a current yield of 7.5%, but DryShips low yield of 1.20% is a break from the norm. Genco Shipping & Trading (NYSE:GNK) is another trend-following drybulk carrier with a 7% dividend yield.

Valuation
Value investors can use the PEG ratio to compare companies in the same industry. A PEG ratio below 1 is a strong signal for potential future growth and a complimentary low price-to-sales ratio (P/S) adds more validity to the argument. Eagle has a PEG ratio of 0.45 and a P/S of 9.6, while DryShips has an even lower PEG ratio of 0.05 and a comparatively lower P/S ratio of 3.8. Eagle's higher P/S ratio suggests that investors are paying more per share for each dollar of revenue generated. Bermuda-based Excel Maritime Carriers (NYSE:EXM) is a smaller drybulk carrier with an equally low PEG ratio of 0.24 and a P/S ratio of 2.9. (Read all about value investing and other strategies in Stock-Picking Strategies.)

Market Risk

Taking a look at beta, a measure of market risk, versus returns gives investors another viewpoint. DryShips' current beta of 2.78 and its return of 12% over the past 12 months illustrate the marriage between risk and return. A beta of 1 suggests that a particular stock rises and falls with the overall stock market. A beta above 1 increases the opportunity or risk of outperforming or underperforming the market. Eagle's current beta of 1.14 suggests lower volatility in relation to market swings. Eagle returned about 5.5% to investors over the same previous 12-month period.

Final Thoughts
Excel Maritime with a beta of 2.25 returned 2% over the last 12 months, indicating that one valuation metric is not enough to measure the potential returns of an investment. Rather, investors are better off beginning with an investment theme followed by the use of a couple valuation metrics when comparing companies in the same industry that look more alike than not.

For more on finding the right investment theme for you, check out Beta: Gauging Price Fluctuations and Personalizing Risk Tolerance.

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