Two stocks to buy
Shipping rates can be very variable. Shares in ship owners can be even more so. This is a high-risk area that’s not for the faint hearted. But if you can cope with substantial volatility in return for the possibility of making well-above-average returns by timing the market right, shipping stocks can be a very interesting and under-followed area of the market. That makes it well worth getting to know what drives the sector.
The ideal time to get into shipping shares is when they’re sinking fast, accompanied by sentiment that’s drowning in doom and gloom – so long as you understand what’s driving it. Shipping is cyclical and prone to extremes due to its financial and operating leverage. Ship owners generally fund their fleets with debt, leaving their balance sheets highly geared. High running costs mean that owners’ profitability is very dependent on charter rates. When these are low, profit forecasts are at their most pessimistic.
In truth, we’ve passed the low point in the current cycle. But with stock prices driven more by the pace of profit pick-up rather than by the actual earnings level, there could still be plenty of upside in some shipping shares as the backdrop improves.
Diana Shipping (NYSE: DSX) is a US-listed global shipper that specialises in the dry bulk business. Diana’s fleet consists of 34 dry bulk vessels – mostly Capesize and Panamax – and it is due to take delivery of one new Capesize vessel this month. The market cap is $429m, compared to shareholders’ funds of $393m as at 31 December 2021. Against this, longterm borrowings were a racy $424m.
However, analysts’ average earnings per share (EPS) estimate for 2022 is $1.77 which compares with the current $5 share price, according to MarketWatch data. Even with a 2023 forecast EPS decline to $1.55, that’s a forecast price/earnings (p/e) ratio of 3.2 – cheap in anyone’s language.
Switching to tanker shipping, Teekay Tankers (NYSE: TNK) is the world’s largest operator of midrange tankers: Suezmax, Aframax and LR2 (Aframax size for clean products). It has just released quarterly results that include some signs of cautious optimism. “Many leading indicators for a tanker market recovery continue to improve,” says its management. “Growing oil demand is expected to surpass preCovid-19 levels this year, while… crude oil production continues to increase and global inventories continue to decline… Positive tanker supply fundamentals include a small order book – particularly from the second half of this year… and increased scrapping.”
The market cap is $443m compared with shareholders’ funds of $838m as at 31 December 2021 (long-term liabilities totalled around $800m). While analysts expect the firm to be lossmaking this year, the average 2023 EPS estimate is $2.39 versus the present $13 share price, according to MarketWatch data. That would put Teekay Tankers on a very inexpensive forward p/e ratio of 5.4.