Stifel Downgrades Diana Shipping To Hold: Here's Why

In a report published Monday, Stifel analyst Benjamin Nolan downgraded the rating on Diana Shipping Inc. (NYSE: DSX) from Buy to Hold, with a price target of $8. The analyst believes that the stock has limited upside potential until the dry bulk market shows signs of a more meaningful recovery.

The company reported its June quarter results, with the earnings beating estimates but in-line with the consensus expectations. Diana Shipping was also able to lower its vessel opex to a greater than estimated extent, although partially offset by increased interest expense.

"What DSX lacks in operating leverage is made up in financial strength," Nolan stated, while reporting that the company has successfully rechartered several of its vessels through mid-2016, although a large part of these new charters are at rates that are lower than before.

According to the Stifel report, "As a result of the industry high level of time charter coverage, the company has hedged out the risk of poor utilization but has also removed much of the upside potential from periods of market strength such as those currently taking price."

In addition, Diana Shipping's debt to capitalization ratio is the lowest in the sector, which positions the company to best weather continued softness in the market. However, this also means that the company will receive lower benefit to equity during periods of improvement.

The analyst has reduced the 2016 estimates for the company to account for expectations of lower charter rates, especially during 2016.

"While we believe the dry bulk market has bottomed, we are now expecting a more protracted market recovery that does not return to equilibrium until 2017," Nolan added.