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Shipping stocks just can't seem to escape their history of futility. After finally gaining ground in 2017 thanks to a rebalancing of vessel capacity supply and demand, shipping stocks are struggling under the weight of the trade war between the United States and China. Apparently, Wall Street thinks slapping tariffs on everything from steel to soybeans poses a risk to ocean-going trade routes. Despite a temporary truce halting tariffs at 10% through February, things may get worse before they get better if shippers struggle to adapt to a global low-sulfur fuel standard that goes into effect in 2020.
The perpetual woes of the shipping industry always make it a candidate for bargain-hunting investors. That hypothesis hasn't exactly worked out recently, but maybe this time is different. Investors weighing their options might want to know: Is DryShips (NASDAQ: DRYS) or Eagle Bulk Shipping (NASDAQ: EGLE) the better stock to buy?
Image source: Getty Images.
The case for DryShips
Shares of DryShips have gained 60% since the beginning of 2018. While the shipping industry's ongoing recovery has played a significant role in a strengthening business, the company has also made wise decisions managing its fleet. The business has sold dry bulk carriers while adding crude tankers and gas carriers. The latter have helped to improve the health of the business, thanks to booming gas trade globally and falling daily operating expenses per vessel. After announcing its intention to spin off its gas carrier business, the company wisely canceled those plans and instead decided to retain the awesome profit generation potential.
Consider how the fleet composition and daily average operating profit -- calculated as the time charter equivalent (TCE), a measure of the average daily charter rate, minus the daily average operating expense per vessel -- have improved this year from 2017.
| Metric | Q3 2018 | Q3 2017 | Year-Over-Year Change |
|---|---|---|---|
| Dry bulk vessels, average | 18.2 | 21.8 | (27%) |
| Dry bulk, average daily margin | $7,940 | $2,472 | 221% |
| Crude tankers, average | 5.1 | 4.0 | 25% |
| Crude tanks, average daily margin | $11,250 | $3,169 | 255% |
| Gas carriers, average | 4.0 | 1.2 | 233% |
| Gas carriers, average daily margin | $20,514 | $12,538 | 64% |
Data source: DryShips press release.
The all-around improvement allowed DryShips to post an operating income of $29.6 million on revenue of $136.8 million in the first nine months of 2018, compared with an operating loss of $27.9 million on revenue of just $58 million in the year-ago period. That year-over-year gain may not entirely erase the memory of multiple reverse stock splits in recent years, or years of awful management, but the business is on more solid footing. "More solid" is relative, though, and investors simply cannot overlook the fact that this has been a horrible investment.