Is Diana Shipping Destined for Greatness?
Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Diana Shipping fit the bill? Let's look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Diana's story, and we'll be grading the quality of that story in several ways:
Growth: Are profits, margins, and free cash flow all increasing?
Valuation: Is share price growing in line with earnings per share?
Opportunities: Is return on equity increasing while debt to equity declines?
Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Diana's key statistics:
DSX Total Return Price data by YCharts
Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
Revenue growth > 30% | (23.3%) | Fail |
Improving profit margin | (90.3%) | Fail |
Free cash flow growth > Net income growth | (36.5%) vs. (92.5%) | Pass |
Improving EPS | (92.4%) | Fail |
Stock growth (+ 15%) < EPS growth | 14.7% vs. (92.4%) | Fail |
Source: YCharts.
*Period begins at end of Q2 2010.
DSX Return on Equity data by YCharts
Passing Criteria | 3-Year* Change | Grade |
|---|---|---|
Improving return on equity | (94%) | Fail |
Declining debt to equity | 11.1% | Fail |
Source: YCharts.
*Period begins at end of Q2 2010.
How we got here and where we're going
Things don't look good for Diana today. The dry bulk shipper earns only one out of seven passing grades, and that was more a technicality than a genuine improvement. Diana's far from the only shipping company to suffer from a weak macroeconomic environment, but does this company have what it takes to power through and recover? Investors seem to think so, as shares have hit new highs despite ongoing fundamental weakness. Will they be rewarded over the long term, or is this optimism doomed to peter out? Let's take a closer look.
One key measure of dry bulk potential, the Baltic Dry Index, has dropped drastically from a level of 11,000 in 2008 to barely a tenth of that level today. Diana has thus been suffering through a period of both declining demand and weakened dry shipping rates, which can be blamed at least in part on tepid economic growth in India and China. However, rising demand for iron ore in China might help Diana overcome its sagging fortunes. The U.S. Department of Agriculture expects exports of soy and grain to accelerate through the end of the year, which may also help push shipping prices higher in the near future.
Diana Shipping seems to believe in a brighter future, as it's been aggressively expanding its fleet with relatively young vessels and some new construction. Earlier this week, the company won a bid for a Kamsarmax dry bulk carrier built in Japan for a price of $22.7 million. Diana also recently bought two ice-class Panamax dry bulk vessels for $58 million, bringing its current fleet count to 38, some of which are expected to deliver through the Arctic travel season in 2014.
Diana's rival Dryships has also been expecting the delivery of its four ice-class dry bulk vessels, so expansionary trends do seem to be catching on in the industry. My fellow Fool Dan Caplinger points out that Diana Shipping has a healthier balance sheet than peers DryShipsand Navios Maritime Holdings , which provides greater flexibility to modernize its fleet for better margins in weak industry conditions. Shipping rates are expected to triple in the next two years as growing raw materials demand has started absorbing the plague of overcapacity, which should help Diana recover from its long slide.
Putting the pieces together
Today, Diana Shipping has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
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The article Is Diana Shipping Destined for Greatness? originally appeared on Fool.com.
Fool contributor Alex Planes and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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