Wednesday, April 22, 2009

Best Way to Play Dry-shippers: TBSI

An upgrade by Oppenheimer to DryShips (DRYS) this morning has sent that stock and the rest of the dry-bulk shippers flying today. DRYS is the big daddy of the space with the most revenues of their peers. It's also had one of the highest debt-loads, which caused it to recently dilute holders through a $500MM equity offering. With the fresh new capital raised, and today's upgrade, DRYS has been off to the races - recently trading up 26%.

The fact is the whole dry-shipper space is a good buy -- unless you believe the world is going really dark for a while. Stocks such as Eagle Bulk (EGLE), Diana (DSX), Genco (GNK), Excel Maritime (EXM), and FreeSeas (FREE) are all good values here and most pay good dividends. They've all gone through a vicious sell-off and stabilized a few months ago. Now, any hints of strength in commodities in China or India and these stocks all tick higher. (If you can't stand super-high beta stocks: avoid these.)

The big cloud hanging over the sector has been the high levels of debt these companies are carrying and whether they'd be able to renegotiate this. DRYS' ability to raise cash is a bullish sign for the sector (their debt-to-cash ratio had been 10:1 before the new slug of capital came in).

My favorite play in this space is TBS International (TBSI). They operate smaller vessels which they can move around quickly to meet customers' demand. They also have perhaps the most conservative debt-to-cash profile in their industry. They just got out of some commitments to take on new vessels to better control their costs in the current enviornment.

TBSI pays no dividend, because their management reports they need to use it to better follow growth opportunities. Yet, pick any time period over the last couple of years and map TBSI's stock performance against their peers and you'll find TBSI tends to outperform. Their biggest strength, in my view, is their relative valuation. While their peers trade at Enterprise Value-to-EBITDA ratios in the 5s (still cheap), TBSI trades at 1.8x.

Originally published in on 4/17/2009 3:17 PM EDT

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