Value Line recently initiated coverage of Diana Shipping Inc. (DSX) in its flagship product, The Value Line Investment Survey. This Greek shipping company owns and operates dry bulk vessels for international shipping. Diana specializes in the transportation of commodities, such as iron ore, coal, and grain, among others. In addition to its eponymous shipping business, the company also owns a 9.5% stake in Diana Containerships (DCIX).

Founded in 1999, the company owns 37 shipping vessels, among the fleet is the recently introduced “Crystalia”, an Ice Class Panamax ship. The “Panamax” name derives from its intended passageway, the Panama Canal, and make up over half of Diana’s fleet with a total of 19 ships.  The remainder of the company’s fleet is made up of a variety of ships classified by size and shipping route. For instance, the three Post-Panamax shipping containers are among the largest in the world, and too vast to transport through Panama. Rounding out the company’s arsenal are ten Capesize, three Kamarsax, and two Newcastlemax vessels.

Diana is in the midst of an expansion. Over the past few years, the company has invested in growing its fleet. This strategy lends itself to a more focused long-term plan. That is, by investing the money in an updated fleet in the short term, Diana saves itself millions in operating costs related to aging ships further down the road. In addition to the aforementioned “Crystalia”, the business expects to add another Ice Class Panamax vessel by the end of the first quarter. After that, two Newcastlemax vessels and one Kamarsax are expected to be delivered within the next year, helping the company realize its goal of a 14% fleet expansion. In the mean time, though, the production and other costs affiliated with these ships will likely hurt the bottom line.

The operating environment for shipping companies has been a challenging one recently. International charter rates were down over the past year, putting pressure on the entire industry. As Diana derives the bulk of its revenues from charter arrangements, the downward trend was especially adverse. In fact, despite increasing its fleet, total business decreased by about 25% in 2013. And while the new ships probably weighed on profitability last year, the aforementioned macroeconomic concerns were likely the main drivers for the $75 million-plus year-over-year swing into the red.

Luckily for potential investors in Diana, the external forces that determine the nature of the shipping industry are largely uncontrollable, and affect all companies equally. Thus, the operationally efficient Diana should have a leg up on most of its competitors if the market turns around. That the “Crystalia” has already been committed to an 18-month lease merely weeks into its life underscores the Greek company’s ability to glean new business even in lean times. Still, we caution that shipping rates are highly volatile, in which case Diana and its expanded fleet could struggle into the future.

Subscribers interested in owning a piece of this small-cap shipping provider are advised to consult Value Line’s quarterly reports for Diana Shipping Inc., as well as any supplemental reports and relevant articles as important news items arise.

At the time of this article’s writing, the author held no positions in any of the companies mentioned.