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Stock Strategist Industry Reports

Dry-Bulk Shippers Still in Troubled Waters

Companies likely to restructure in 2012 as they navigate dire straits.

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Oversupply has kept dry-bulk shippers in the brig, and it will take some time before they are squared away. Strong demand for the dry-bulk trade continues to be fully offset by available capacity in the existing world fleet. Despite record-breaking scrapping rates and elevated slippage rates, oversupply is expected to keep a lid on freight rates for all of 2012. When the Baltic Dry Index--which measures shipping demand versus supply--reached a 25-year low Feb. 3, some industry participants called for a bottom. However, we think headwinds will weigh heavily for some time, and we would delay investment in this market until the order book trims down and the rate of new orders weakens. We think this is likely to occur in late 2012, at the earliest, or early 2013.

Despite the near-term pains anticipated in dry-bulk shipping, we think many of the companies we cover are fairly valued to slightly undervalued. Initial first-quarter earnings reports have reaffirmed our view that 2012 will be difficult for ship owners and, as a result, our dry-bulk shippers have traded lower. We think Eagle Bulk Shipping and Genco Shipping & Trading are the most exposed to a prolonged weak period in shipping. Conversely, Diana Shipping and Navios Maritime Holdings are our two favorite picks to weather an extended downturn.

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Paul Choi does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.