If the global economy is in a recession, then the dry bulk shipping is going through a depression. A look at the chart of the Baltic Dry Index (BDI), the lifeblood of the dry bulk sector, looks like a waterfall. From its peak in the summer of 2008, the BDI fell over 90%.

IN PICTURES: Eight Ways To Survive A Market Downturn

Riding the Wave
As goes the BDI, so goes the dry bulk shippers. Their decline rivaled that of the banking industry in the second half of 2008. DryShips (Nasdaq:DRYS), a dry bulk shipper that operated in the spot market, has seen shares fall from over $110 last year to $7 today. Like DryShips, no dry bulk shipper was spared from the industry free fall. Dry bulk shippers ship things like iron ore, cement, coal and grains, and when commodity prices went into a free fall, the excess capacity in shipping caused shipping rates follow, taking the companies down with it. (To learn momre, see Timing Trades With The Commodity Channel Index.)

Still Docking
While the market rally has certainly buffered the dry bulk sector, the industry still remains in a terrible funk. In fact, the BDI index has nearly quintupled since its lows in December, yet shipping stocks haven't really gone anywhere, due to excessive overcapacity. When shipping rates were in a boom, the industry went into a massive expansion phase. Shipping companies took on massive amounts of leverage to acquire new ships and enter into contracts to purchase ships in the future. With the benefit of hindsight, that turned out to be a disastrous move for nearly every dry bulk shipper.

Getting Through the Storm
I wouldn't expect prices to reach 2008 highs anytime soon. However, with stock prices down over 90% in some cases, opportunistic investors may want to take a look. Marine shipping is still the most efficient way to transport goods between countries and when China regains its appetite, it could mean that the storm is passing for the dry bulk sectors. However, it's important to differentiate between the players.

Eagle Bulk Shipping (Nasdaq:EGLE) primarily sails a fleet of Supramax ships. These are smaller ships than the huge Capesize and are equipped to carry just about every type of dry bulk cargo. Additionally, Eagle's business model is to enter into multi-year charter contracts for its ships, thus minimizing revenue volatility when the shipping rates shift. Over 74% of its fleet is covered by charter for 2009. This model is unlike DryShips, which was more focused on the spot market, so it was feast or famine for the company depending on shipping rates. The key is to pay attention to Eagle's debt. The company has renegotiated its covenants, so it has no immediate liquidity needs; if the credit markets seize up again, things could get bumpy. The shares trade at $6, and the company earned 37 cents a share for the 2009 first quarter, with a fleet utilization of 99%. These are impressive numbers in a terrible environment. If we normalize earnings for the year - which is plausible because ships are locked into contracts - then 2009 EPS is $1.48, implying a P/E of four.

Another under-the-radar name that stands out is Euroseas (Nasdaq:ESEA), a company with a current ratio of 3.2. It's a small player but the strong balance sheet may appeal to some investors. In addition, Safe Bulkers (NYSE:SB), a 13 fleet shipping company, currently trades for a P/E of 2.4 and a forward P/E of 3.5, both very attractive multiples. (For more, check out CFA Level 1 - Using Price Multiples.)

Bottom Line
As long as the shippers continue to suffer from excess capacity, investing in the dry bulk industry will require patience and an ability to stomach volatility. Focus on the strongest operating models and balance sheets. DryShips was forced to raise capital in January through a $475 million equity issue because the debt market was unavailable. These actions can crush existing shareholders. However the world will always need coal, grains and cement, and they all have to travel by ship.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  7. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  8. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  9. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  10. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  4. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  5. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  6. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>

You May Also Like

Trading Center