Don’t Buy DryShips, Buy Horizon Lines Instead!

| July 11, 2011 | 0 Comments

Dry Shipping CompaniesThe dry bulk shipping industry is an intriguing industry to invest in.  To some extent, it’s one of the purest ways to invest in the expectations of the global economy.

Here’s the deal…

Dry bulk shipping is used by companies and governments to ship commodities such as coal and iron ore.  These items are too heavy (and expensive) to ship by air… so bulk carrier merchant ships are pretty much the only shipping option.

As you can imagine, it’s not cheap to ship dry goods overseas.  The bulk carriers themselves cost a fortune to build.  It takes a significant amount of time and effort to load and unload the cargoes.  And fuel is expensive as well.

But that’s what makes the industry really interesting…

You see, no one is going to ship tons of iron ore across the ocean on a whim.  You can bet there’ll be a buyer for every ounce.  And the products being shipped tend to be leading indicators of economic growth.

What’s more, because of the cost of shipping overseas, dry shipping is an excellent gauge of supply/demand dynamics in these important commodities.

However, despite the economic importance of the industry, it’s difficult to find good dry shipping companies to invest in.

First off, the global economy isn’t running at full steam… so demand for dry shipping is in a cyclical down period.  Moreover, there are entirely too many bulk carriers on the seas right now.

In other words, the industry is dealing with low demand and high supply.  That’s never a good thing for the bottom line.

That being said, there are some dry shipping penny stocks worth investing in.  You just have to know how to differentiate the best opportunities from the rest of the herd.

For instance, one popular company I’d avoid is DryShips (DRYS).

DRYS is one of the larger dry shipping companies trading on a US exchange.  They own roughly forty dry bulk carriers and have a market cap of over $1.5 billion.

Look, DRYS isn’t a bad company.  In fact, they have a lot going for them.  Their revenues and profits are growing.  And the stock is trading at a very reasonable valuation.

Here’s the problem…

Debt.  The company has almost $3 billion of debt in fact.

And while many companies in the dry shipping industry are loaded with debt, DRYS’ burden is heavier than most.  The company’s debt payments are so high, they virtually wipe out all of their cash flow from operations.

That doesn’t seem like a good recipe for the company’s future growth.

So, instead of DRYS, take a look at Horizon Lines (HRZ).

Horizon is a much smaller company than DRYS.  They own or lease around 20 vessels… but their market cap is a mere $35 million.

HRZ’s smaller size gives it an advantage over its larger peers.  While the company still has a hefty $500 million in debt, it’s just a fraction of what DRYS owes.  And HRZ’s operational cash flow more than covers their debt payments.

In fact, historically the company has had enough excess cash to do something DRYS’ management could only dream of… offer a dividend.

You read that correctly, this small, cheap company offered a $0.20 dividend in 2010.  That may not seem like a lot, but it’s a really impressive 18% yield at the current stock price!  Hard to beat that… not to mention the company has solid growth potential as the economy picks up steam.

Now, the company has suspended their dividend this year due to the macro challenges the industry is facing.  But there’s no reason they can’t reinstitute it once business picks up.

Here’s the bottom line…

The dry bulk shipping industry provides investors with interesting investment opportunities.  And while most of the penny stocks within the industry are laden with debt, some are better choices than others.  DryShips isn’t a bad company overall, but they have too much debt for my taste.  Instead, take a look at Horizon Lines… they have less debt, higher growth potential, and they may even offer a dividend before long.

Yours in profit,

Gordon Lewis

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