Better Buy: Seaspan Corporation vs. Diana Shipping Inc
You can look at recent financial and stock market results to compare ship-owners Seaspan Corporation (NYSE: SSW) and Diana Shipping Inc (NYSE: DSX). However, that might not give you the best possible answer for which one is the better investment for your portfolio. Why? Because the two ship owners not only serve different markets, they have divergent operational approaches. Here's what you need to know to figure out which one is the better buy for you.
Similar but not the same
At their core, both Seaspan and Diana own large boats that carry products around the globe. And they both use a similar model in which they buy ships using leverage and then lease them out to other companies. However, Seaspan focuses on owning container ships that carry the metal boxes generally used to transport finished good, and Diana owns the dry bulk carriers that move commodities like iron ore and coal. There are different supply and demand dynamics in each market.
That's not the only important difference; Seaspan and Diana also take vastly different approaches to the way they manage their portfolios. Seaspan generally likes to ink long-term contracts, with its average lease term hovering around five years. Diana, on the other hand, prefers to stick with short-term charters. It tends to structure its fleet so that ships are coming off charter at regular intervals, allowing it to recontract at prevailing rates.
This is a big difference. Seaspan's model tends to result in more subdued performance in good markets and less of a drawdown in bad markets. In other words, it will provide more stable performance through the shipping cycle. Diana's results will be more prone to shift up and down with the market and, thus, will be more volatile.
To give you an example of what that looks like, 2017 was a tough year for Seaspan's top and bottom lines. Revenues were off 5%, adjusted earnings fell around 40%, and adjusted EDITDA declined 15%. Despite these results, partly driven by lower rates for rechartering ships after the end of long-term contracts, the company remained solidly profitable, with adjusted earnings of $0.66 per share.
Diana, meanwhile, saw revenues increase year over year in 2017, but still reported a loss even after taking out a large $4.12 per share fourth-quarter impairment charge. Interestingly, though, it was able to increase the rates it charged in 2017 over 2016. That increase came off of a low base, with company president Anastasios Margaronis explaining that "2016 will certainly be remembered [as] possibly one of the worst years of the last decade." So even though the business environment improved, it wasn't enough to push Diana into the black as its reliance on shorter-term leases remained a headwind despite an improving market.
How to pick
The question you need to ask is, "Which model makes more sense to me?" If you're a conservative investor looking for stable financial results, then Seaspan's longer-term charters will be the better option for you. However, if you're more aggressive, and perhaps trying to time an improving shipping market, then Diana's shorter-term focus will probably be more appealing. I'm not a fan of the ship leasing industry, so I wouldn't buy either of these companies. But before you consider jumping in, here, make sure you understand the differences between the way Seaspan and Diana approach the industry.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Seaspan. The Motley Fool has a disclosure policy.