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diana shipping inc-dsx

Is There A Margin of Safety Buying Diana Shipping Company?

August 30th, 2012 Posted by Investment Valuation No Comment yet

Diana Shipping Inc (DSX) is a global provider of shipping transportation services. DSX specializes in the ownership of dry bulk vessels.

DSX Value Investing Approach 

This investment valuation is prepared in a simple and easy way to value a company for business buying, business sell, and business evaluation. This model adopts the investment style of Benjamin Graham, the father of Value Investing. My basis in valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement.  The financial statement is scrutinized prior to the valuations.  In this model, we calculate first the enterprise value as our first step in the valuation. I also apply the relative valuation method by using Price to Earnings (P/E), Earning Per Share (EPS), Enterprise Value (EV) and Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA).

The Investment in Enterprise Value

In valuing Diana Shipping Inc, I performed the Enterprise Value (EV) valuation. The concept is to calculate what it would cost to purchase an entire business. Enterprise value represents the total value of the entire company. It factors liabilities and cash. In other words, EV measures the value of the productive assets or the operating assets that are used in producing its product or services.

Market capitalization, on the other hand, is the total market value of all of the company’s outstanding shares. Computed by multiplying a company’s shares outstanding by the current market price of the share. The total debt represents the sum of short-term debt and long-term debt. Cash and cash equivalent are taken from the balance sheet as well as the short term investment.

diana shipping inc.

Explanation

In calculating the enterprise value of DSX, total debt is added to market capitalization and cash and cash equivalent plus short-term investment were deducted, then it produces the enterprise value. In buying a company, you do not only buy the equity but you also have to pay for the debt of the company. That is why total debt was added to market capitalization. Cash and cash equivalent plus short-term investment were deducted because this account is not an operational asset, the company is not using cash to generate revenue. Cash could offset debt and can be absorbed by the buyer.

Market Capitalization

Market capitalization as seen in the table above represents the total value of the company’s equity shares as valued by the market.  While, the enterprise value, represents the value of the productive assets or operating assets both equity capital and debt capital. This is the costs of the entire company if you are buying. It shows that the value of the company was diminishing in value from its five years of operation.  The total debt represents 27% of the enterprise value, while cash was 24%.  EV was trending down at -53, 3, -12, -42 and 12% with an average of -18% from 2008 to 2011 and the TTM. The distribution of the buying price would be as follows:

Average = Total Operating Assets – 100% = Equity – 98% + Total Debt (net of cash) – 2%

TTM        =  Total Operating Assets – 100% = Equity – 100% + Total Debt – 0%

The enterprise value represents almost 100% equity, total debt has only 2% average. Total debt was offset by cash and cash equivalent, these two accounts were almost equal in amount.  If an investor buys the entire business, the investor is paying for the company’s total equity.  Enterprise value is trending down by  -20% average, while market value is trending at 3% average.

Benjamin Graham’s Stock Test

Net Current Asset Value per Share (NCAVPS)

The concept of this method is to identify stocks trading at a discount to the company’s net current asset value per share, specifically one-third below net asset value or two-thirds of NCAV. This method is one of the oldest documented stock selection methodologies, dating back in the 1930s.

DSX NCAVPS

Explanation

The current assets are basically considered as cash, its liquidity is for a short period of time less than one year.  Net current asset value excludes land, properties, and equipment, which is included in book value. NCAV is the excess of current assets over current liabilities. Graham looked for stocks trading for less than two-thirds of the company’s NCAV. The computed 66% of NCAVPS was lesser than the price, therefore, it did not pass the test in buying the stock. Diana Shipping price was over 77% average from the computed 66% of the NCAVPS. The stock price was trading over the company’s liquidity value at 49% over the trailing twelve months. It indicates that the price was expensive.

Market Value/Net Current Asset Value (MV/NCAV)

Another stock test made by Graham is by calculating market capitalization by NCAV and the result should be lesser than 1.2 ratios The result shows the ratio was greater than 1.2, therefore it indicates that the price was expensive. The stock price of DSX shows that it was trading at an overvalued price base on the MV/NCAV stock test of Graham.

diana shipping inc.

Benjamin Grahams Margin of Safety

MOS is used to identify the difference between company value and price. It represents an excess of intrinsic value over market price, or alternatively, a discount of the price below the intrinsic value of at least forty to fifty percent is desirable. MOS requires knowing when the buying price is low in absolute terms rather than merely relative to the market as a whole. This formula is used to identify the difference between company value and price. It represents an excess of intrinsic value over market price, or alternatively, a discount of the price below the intrinsic value of at least forty to fifty percent is desirable.

Explanation

Enterprise value, in theory, represents the entire cost of a company if someone were to acquire it. Enterprise value is a more accurate estimate of takeover cost than market capitalization because it takes includes a number of important factors such as preferred stock, debt, and cash reserves.

Intrinsic Value = EPS x (9+2*Sustainable Growth Rate

Explanation

Here is the explanation for the formula: EPS: the company’s last 12-month earnings per share; G: the company’s long-term (five years) sustainable growth estimate; 9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham proposed an 8.5, but we changed it to 9); 2: the average yield of high-grade corporate bonds.

The intrinsic value of DSX has an erratic movement. In 2008 it was very low but jumped up to 654% in 2009 and trending down by an average of 19% up to 2012 ttm.

Explanation

The return on equity was 7.99 in the trailing twelve months.

Explanation

The graph shows that the intrinsic value (IV) line was below the enterprise value (EV) line in 2007, and the point of intersection was in 2008, and it goes up higher in 2009 from $14 to $56.39 with a percentage of 403%. and slightly going down at an average of 19% from 2010 to 2012 TTM.  This shows that the enterprise value or the price was lesser than the true value, therefore the price was cheap from 2009 to 2012 TTM. The margin of safety was 77% average over the intrinsic value.

According to Graham, when a market price is considerably lower than the intrinsic value by a minimum of 40-50%, then he would consider buying.  It shows that the price was lesser than the intrinsic value by 45% average from 2007 to 2012 TTM. The buying price for the entire company would be $597 at $7 per share of stock.

DSX Relative Valuation Method

This method of valuation is used to compare the market values of the stock with the fundamentals of the stock.

Price to Earning*Earning Per Share (P/E*EPS)

The PE*EPS ratio indicates that the price was higher than the PE*EPS ratio in 2007 and 2008, telling us that the price was trading at an overvalued price. On the other hand, from 2009 to 2011 and the TTM, the price is equal to the PE*EPS ratio, indicating that the stock price is trading at fair value.

Explanation

By using the average price to earnings ratio in P/E*EPS valuation it produces a higher result than by using the relative price to earnings ratio. The P/E*EPS result was greater than 17% in using average price to earnings ratio. EPS serves as an indicator of a company’s profitability.

Enterprise Value/Earning Per Share (EV/EPS)

Another use of this ratio is by dividing the enterprise value per share by its projected earnings per share (EPS).   The price to earnings (P/E) was 40% average, whereas, the price was averaging 60%. On the other hand, using the average price to earnings ratio, the price is 107% and the earnings are -7%.  In 2007 to 2012 price was 58% and the earnings were 42%. Based on the relative Price to Earnings ratio, the price was trading at an overvalued price.

Enterprise Value (EV)/Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries. It gives us an idea of how long it would take the earnings to pay off the price of buying.

Enterprise value is the value of the company. While EBITDA is net income with interest, taxes, depreciation, and amortization. EV/EBITDA tells us the investor will cover up the purchase price in cash in 6 years. However, in TTM, it will take 4 years of the earnings of the company to cover the costs of buying.

Conclusion

The current market price as to date, 8/22/2012 was $7.07 and the margin of safety is 55%. It exceeds Benjamin Graham’s requirement in buying at 40-50% margin of safety. Therefore, I recommend a BUY for the stocks of Diana Shipping Inc (DSX).

Written by Cris

diana shipping inc dsx

Diana Shipping Inc (DSX) Financially Sound

July 27th, 2012 Posted by Company Research Report No Comment yet

Diana Shipping Inc. (DSX) is a global provider of shipping transportation services, specializing in the ownership of dry bulk vessels. Source: Diana Shipping Inc. website

Diana Balance Sheet

Liquidity

Diana Shipping Inc is financially stable, with extremely high current asset and quick asset ratio of average 671 percent and 892 percent respectively and its working capital is tremendously increasing per period.

  • Working capital was $1, 49, 265, 322 and $385. Average of $204. The company’s working capital was consistently increasing with a high gap each year. This further means that the company is indeed making progress.
  • The current ratio was 1.05, 3.45, 9.28, 10.76 and 9.02. Average of 6.71, which means the company has $1.05, 3.45, 9.28, 10.76 and $9.02 of current assets for every $1 of current liabilities.
  • Quick ratio was .95, 3.30, 9.19, 10.64, and 8.92. Average of 6.60. It tells us that, the quick assets had $0.95, 3.30, 9.19, 10.64 and 8.92 for every $1 of current liabilities.

Working Capital

Working capital showed that the yearly balance is increasing. It tells us that, the company was able to meet its current obligations such as payment of salaries to its staffs, utility bills and make loan payments. Current ratios indicate that current asset is greater than the current liabilities at the ratio of 6.71 average, while quick ratios increase from year to year at 8.92 average.

Based on the analysis and balance sheet statement, its current asset was mainly cash and cash equivalents of about 96 percent. The company is running its business hassle-free on almost purely cash basis. This is possible considering that the line of business is a shipping company.

Cash Conversion Cycle

Cash conversion cycle (CCC) is a metric used to measure the length of time the company is able to turn resources inputs into cash flows. To measure this, we use the following related ratios.

  • Inventory turnover ratio was 19, 18, 18, 16 and 13. Average of 17. The company’s inventory has an average of 17 times turn each period.
  • Inventory conversion period was 19, 20, 21, 22 and 28. Average of 22. The average days to convert its inventory to sales were 22 days.
  • Receivable turnover ratio was 95, 168,0, 0 and 43. Average of 61, which means the company’s receivable turns 61 times average.
  • Receivable conversion period was 4, 2, 0, 0, and 9. Average of 3. The company’s average days to collect its receivable are 3 days.
  • The payable turnover ratio was 47,0, 0, 0 and 37. Average of 17. The company has recorded accounts payable in 2007 and 2011 only with an average turn of 17 times.
  • Payable conversion period was 38, 0, 0, 0 and 39. Average of 15. The company’s payable is 15 days average to pay.
  • Cash conversion cycle was -15, 22, 21, 22 and -3. Average of 9. This tells us that DSX has an average of 9 days CCC.

Further interpretation of the cash conversion cycle:

Particulars 2007 2008 2009 2010 2011 Ave.
Inventory Conversion Period 19 20 21 22 28 22
Receivable Conversion Period 4 2 0 0 9 3
Payable Conversion Period 38 0 0 0 39 15
Cash Conversion Cycle -15 22 21 22 -3 9

Based on the analysis of the company’s debt obligations, Diana Shipping is less indebted, and 143 percent able of paying all its debt obligations, so it’s an ideal company to invest in. In addition, the owners of the company have the majority control on total assets with 76 percent claims.

Financial Leverage

Leverage is the relationship between debt financing and equity financing, also known as the debt-to-equity ratio. Equity is created by the personal funds of the business owner(s), and/or by the stockholders of shares in a corporation. As these funds have no claim on any of the assets of the business, the assets are available to be used as collateral for debt financing. For DSX, debt ratio, debt to equity ratio and solvency ratio from 2007 to 2011 were computed for the leverage. The results are as follows:

Facts

  • Debt ratio was .13, .25, .22, .27 and .22. Average of .22, which means that the company’s debt capital was only 22 percent of total assets.
  • And the debt to equity ratio was .16, .34, .29, .37 and .29. Average of .29. The company’s debt has an average of 29 percent against shareholders’ equity.
  • While solvency ratio was 134.19, 222.16, 121.16, 129.13 and 107.16. Average of 142.76, or 143 percent solvent. Solvency is the ability to pay all debt obligations as they became due.
  • On the other hand, current liabilities to total assets was .02, .02, .02, .02 and .03. Average of .02. The company’s current liabilities was 2 percent average to total assets, so the creditors have 2 percent claims on the total.
  • Likewise, stockholders’ equity to total assets was .85, .73, .76, .71 and .75. Average of .76. The owners’ equity was 76 percent average of total assets; therefore, the shareholders have 76 percent claims on the total assets of the company.

Explanation

The only ratio that measures the company’s effectiveness in generating sales from its investments in plant, property, and equipment is the fixed asset turnover ratio.  It is especially important for a manufacturing firm that uses a lot of plant and equipment in its operations to calculate this ratio. To get this is to divide the company’s revenue by its property, plant, and equipment. For DSX, fixed asset turnover ratio was .21, .34, .22, .23 and .23 with an average of .24. It is good enough considering the value of its investment on property, plant, and equipment.

Diana Income Statement

Profitability

This section of our report gives an overview of the company’s financial performance over a specific period. Nelly, part of Numbers team, shared the profitability ratios of DSX from 2007 – 2011. Let us take a look at the data below.

  • Net margin in percent was 70.46, 65.71, 50.76, 46.75 and 41.86. This simply is the after-tax profit a company generated for each dollar of revenue.
  • While asset turnover was 0.26, 0.34, 0.20, 0.19 and 0.16. This measures the efficiency of the company to convert its assets into revenues.
  • And the return on asset was 18.45, 22.15, 10.22, 8.86 and 6.74. This tells us how much profit the company generated for each dollar on total assets.
  • Moreover, financial leverage was 1.18, 1.36, 1.32, 1.40 and 1.33. This measures the financial structure ratio of the company base on total assets against total stockholders’ equity.
  • Likewise, return on equity was 23.09, 28.15, 13.69, 12.09 and 9.19.   This tells us how much the company could return for every dollar of equity.
  • And the return on invested capital was 19.18, 23.19, 10.57, 9.21 and 6.94. This is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business.

Explanation

Diana Shipping Inc.’s profitability in terms of their net profit margins has been trending down for the last five years. This means that net income and revenues were slightly playful or unstable during the previous years. Despite that, they have a higher profit margin, generated for each dollar of revenue compared to their asset turnover. As the rule, the higher the profit or the net profit margin, the lower the volume of the asset turnover. This determines the attractiveness of the business. Meaning that in terms of revenue they generate more than converting assets into revenues.

Return on Asset

The return on assets was high in 2008 of 22.15 percent as compared to 2007 of 18.45 and the latest years 2009 to 2011 which slightly decreased yearly by 10.22, 8.86 and 6.74. This means the company’s earnings from total assets declined because of the increase in total assets of 944 million dollars, 1,057, 1,320, 1,585, 1,604 from 2007 to 2011.

Financial Leverage

With regards to their financial leverage, the portion of the return on equity as the result of debt measured by the equity multiplier showed an up and downtrend for the last five years. This was in relation to total assets and total stockholders’ equity. Return on equity increased in 2008 and declined through the following years. This means the return earned a higher percentage of internally generated revenues.

Income

  • Revenue in million dollars was 190, 337, 239, 275.45 and 257.
  • Gross profit was 152, 282, 186, 210 and 257.
  • Operating income was 138, 226, 124, 134 and 111.
  • Net income was 134, 222, 121, 129 and 107

Explanation

Diana’s revenues had been remarkable for the first two years 2007 and 2008 base on their growth ratio in percent of 64.06, 77.13, -29.06, 15.09, and -6.78 from 2007 to 2011. Likewise, gross profit was the same as their revenues, but gross profit margin has been decreasing of 80.0, 83.7, 77.7, 76.4 and 74.3 from 2007 to 2011. While operating income was in an up and down trend as a result of the operating expenses incurred during the year.

Net Income

Net income, despite the decline, was good especially in 2008 when everything was financially affected by the crisis. They had the ability to achieve a solid financial and operating performance in spite of a difficult industry environment. Moreover, Diana retained long-term strategies with their quality charterers.

Expenses

Their expenses cost revenues account for 21.33 percent of revenues. Operating expenses include sales, general and administrative expense accounts for 7.2, depreciation and amortization of 17. In addition, other operating expenses of -2.  Likewise, its interest expense accounts 2 percent and other income and expense of -54.4 of revenue. So, an average of 54.9 percent was left for their net income. Base on this they have indeed a very favorable and high net profit margin.

The data stated below further explains the expenses incurred from 2007 to 2011:

Facts

  • Cost of revenue was 38, 55, 53, 65 and 66 with an average of 55.4.
  • In addition, sales were 12, 14, 17, 25 and 25 with an average of 18.6.
  • And, depreciation and amortization were 24, 43, 45, 53 and 55 with an average of 44.
  • Further, other operating expense was -22, 0, 0, -2, and -1. Average of -5.0.
  • Furthermore, interest expense was 6, 6, 3, 5 and 5 with an average of 5.
  • While other income and expense were -132, -220, -121, -129, and -106 with an average of -141.40.

Diana Cash Flow Statement

Cash Flow from Operating Activities

Cash flow is a statement wherein you can determine if the company has available funds. It also denotes the activity of cash where the company used it. Cash flow from operation of Diana Shipping Inc. using the indirect method of accounting was in slope. Which the growth represents in percentage at -43, 72, -15 and 16 results from 2007 to 2011. This was due to the net income which movement was also in sideways. Based on the total, for their five years of operation; in percentage, the net income contributes at 80, depreciation at 25. While the prepaid decrease at 1 and other working capital also decreased at 4.

Facts

  • Net income of $ million was 134, 222, 121, 128 and 107
  • While, depreciation & amortization was 24, 43, 45, 53 and 55
  • And prepaid expense was 0, -1, -14, 2 and 2
  • And also, other working capital was 0, -2, -5, -11 and -19
  • In addition, net cash provided by operating activities was 149, 261, 152, 178 and 154.
  • The total in five years was 894.

Using the direct method, the result of cash flow from operating activities in percentage was 44, -68, -8 and -21 from 2007 to 2011. Within their five years of operation only in 2008 grew by 44 percent due to the increase of cash collection by 44 percent. While in 2009 to 2011 was declining which the cash payment exceeds from their cash collection.

Explanation

Cash flow from operating activities can be computed using the direct method of accounting. From the cash collection less all the cash payments made in purchases of goods and supplies, operating expenses were incurred including the interest.

Facts

  • The cash collection was 189, 337, 239, 275 and 257
  • Cash payment for purchases was 38, 55, 53, 65 and 67
  • Payment for operating expenses was 17, 55, 48, 80 and 82
  • Cash paid for interest was 6, 0, 3, 5 and 5
  • Operating activities was 128, 227, 135, 125 and 103

Cash Flow from Investing Activities

Cash flow from investing was an activity of cash wherein the company invested. The following are results from DSX:

  • An investment in property, plant, and   equipment was -459, -110, -65, -260 and -28.
  • And property, plant, and equipment reductions in 2007 was 79 and zero from 2008 to 2011
  • Likewise, acquisitions,   net was zero from 2007 to 2010 and -50, in 2011
  • In addition, other investing activity was -29, 1, -8, 7 and -12.
  • Net cash used for investing activities was -409, -109, -73, -252 and -90.
  • The total for five years was -933.

Explanation

Cash flow from investing in DSX was in sideways in percentage was 44, 12, 8, 27 and 10 results from 2007 to 2011. It tells us that from 2007 to 2009 they minimizing their investment but in 2010 grew by 19 percent due to the additional purchase of PPE. It indicates, the total PPE in five years of operation, contributes to investing was represent to 91 percent, 5 percent from acquisitions and 4 percent from other investing activities.

Cash Flow from Financing Activities

Cash flow from financing activities was a cash activity wherein the company raised and used its funds. In Diana Shipping Inc are as follows:

  • Debt issued was 288, 237, 74, 139 and 15
  • And debt repayment was -327, -98, -30, 0 and -6
  • And also common stock issued was 433, 0, 98, 0 and 0
  • In addition, repurchases of treasury stock were zero from 2007 to 2010 and -1 in 2011
  • While cash dividends paid were -131, -247 in 2007 to 2008 and zero from 2009 to 2011
  • Likewise other financing activity was 0, 0, 0, -2 and 0.
  • On the other hand, net cash provided by (used for) financing activities was 262, -107, 142, 137 and 7

Explanation

The net change in cash has a huge result in 2009 at 99 percent from 2007 data and the cash at end of the period was very impressive grew by 96 percent from 2007 to 2011. It tells us, the management was very efficient in managing their cash flow. Net change in cash was net cash available and ready to use for the next accounting cycle. Below are the results for Diana:

  • Net change in cash was 2, 45, 220, 63 and 71
  • Further, cash at beginning of the period was 15, 17, 62, 282 and 345
  • In addition, cash at end of the period was 17, 62, 282, 345 and 417.

Free Cash Flow

The free cash flow of Diana in 2007 and 2010 was in negative which the capital expenditure had exceeded operating cash flow. In addition, free cash flow was to measures how much cash available after deducting the capital expenditure. Below are the results for Diana Shipping Inc:

  • Operating cash flow was 149, 261, 152, 178 and 154
  • While, capital expenditure was -459, -110, -65, -260 and -28
  • Likewise, free cash flow was -310, 152, 87, -81 and 126.

Explanation

Operating cash flow ratio measures the amount of cash from operation to pay its short-term obligation. In addition, the result of net cash provided by operating activities over total current liabilities was used in order to get the operating cash flow ratio.

  • Net cash provided by operating  activity was 149, 261, 152, 178 and 154
  • While, total current liabilities was 21, 20, 32, 33 and 48
  • In addition, the operating cash flow ratio in percentage was 710, 1305, 475, 539 and 321.
  • Likewise, it’s averaging 670 percent or in every $1 of short-term debt.
  • Meaning, Diana had the capacity to pay it in six times.
  • Moreover, the company had excess cash over their liabilities.

Explanation

Capital expenditure ratio measures the capital available for internal reinvestment. If the result was more than 1, it means the company funds would extend to pay its other obligation.

  • Net cash provided by operating activities was  149, 261, 152, 178 and 154
  • While, investments in property, plant, and   equipment was 380, 110, 65, 260 was 28
  • In addition, capital expenditure ratio in percentage was -39, 237, 234, -68 was 550, average in five years was 226.

The capital expenditure ratio of Diana Shipping Inc was very strong, an average of 226 percent. It tells us, the company has the capability to reinvest its cash and could be used to pay its debt which in every $1. Moreover, Diana had available funds of $2.26, the average for five years.

Debt Ratio

Total debt ratio measures the availability of cash to pay its total debt; through the result of cash from the operation over the total liabilities of the company. The total debt ratio of Diana Shipping Inc declined from 2007 to 2011. It indicates a 103 percent down to 39 percent. Moreover, it means the total liabilities were greater than the cash available from the operations which in every $1 of total debt. Diana have equivalent cash to pay at $1.03, .93, .47, .39 and .39 from 2007 to 2011, respectively.

Facts

  • Net cash provided by operating  activities was 149, 261, 152, 178 and 154
  • While total liabilities was 145, 282, 321, 454 and 396
  • Likewise total debt ratio in percentage was 103, 93, 47, 39 and 39

Written by Rio, Nelly, and Dyne
Edited by Cris

Note:

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