2 Dry Bulk Shippers to Buy, 2 to Bail On

by Susan J. Aluise | June 8, 2012 12:54 pm

2 Dry Bulk Shippers to Buy, 2 to Bail On

“What goes up, must come down,” rock band Blood, Sweat and Tears crooned in Spinning Wheel back in 1969. These days, dry bulk shipping companies could sing those lyrics in their sleep. And the real-world truth of that tune not only is a warning for shipping stocks, but it may point to choppier seas for the global economy in the near term.

One key measure of health for dry bulk shippers is the Baltic Dry Index (BDI), which measures how much it costs to move raw materials by sea. If you’re looking for volatility, there are few better examples. Hopeful economic signs lifted the BDI to 2,173 in October 2011 — but fears over the slowdown in China and the deepening crisis in Greece sunk the index to a low of 647 by early February.

Then the sector got a bounce: Between February and mid-May, it rose a whopping 75%, to 1,165, and rates for some shipping routes have more than doubled over the past six months.

But as slowing growth in China reduces imports of iron ore and coking coal — and fresh fears over Europe[1] (and Greece in particular) spook the market — the BDI slid below 900 this week. Compare any of these recent numbers to the sector’s halcyon days of mid-2008, when the index hit a record of nearly 11,800, and it’s easy to see why shipping companies are struggling to stay afloat.

But what do the BDI’s wild mood swings mean for investors? Two things:

First, the shipping industry won’t recover its 2008 altitude anytime soon. The sector got into this mess because ship owners ordered hundreds of new vessels between 2006 and 2008 when demand was exploding. Then the recession hit, cargo volume plummeted and shipbuilders began delivering new vessels in a down market. Today, there are simply too many ships chasing too little business, and rates are unprofitably low for most companies.

Second, the BDI is a broader gauge of the global economy because it’s a good barometer of macroeconomic factors. Because these ships haul commodities like grain, coal and iron ore, slumping cargoes usually correspond to a slowing global economy.

About the only good thing about dry bulk shipping stocks right now is their price. You can buy a share of each of these five stocks for less than the $1.29 you’d pay for Spinning Wheel on Apple’s (NASDAQ:AAPL[2]) iTunes: Star Bulk Carriers (NASDAQ:SBLK[3]), Excel Maritime (NASDAQ:EXM[4]), TBSI International (OTC:TBSIQ[5]), Paragon Shipping (NYSE:PRGN[6]) and FreeSeas (NASDAQ:FREE[7]).

Nevertheless, a couple of shipping companies are worthwhile bargains now — and a couple are bargains that are unsafe at any price:

Buy:

Navios Maritime Partners (NYSE:NMM[8]). Why buy one of the pricier Greek shipping stocks ahead of Greece’s vote for a new coalition government on June 17? Because it’s possible that the looming peril of doing nothing will make it easier for that nation to form a new government — which in turn could boost the fortunes of Greek stocks.

And if no deal is forthcoming, NMM still has been able to grow its fleet economically and has strong fundamentals compared to most of its peers. Sure, there are challenges: Its valuation is comparatively higher than other shipping stocks, and the market is so weak and volatile that we’re likely to see NMM take another 5% to 10% dip before any sustainable rebound.

That said, I think NMM has what it takes to ride out the storm and is priced about right. Its market cap of around $740 million is one of the sector’s highest — a fact that illustrates the headwinds facing the industry. The stock has risen about 16% since May 18, but is still trading nearly 30% below its 52-week high last August. NMM has a price-to-earnings growth (PEG) ratio of nearly 2, indicating that the stock is overvalued, and a forward P/E of more than 11, which is high compared to most other shipping stocks.

Bottom Line: I like this stock because the company is managed well and it has locked up a lot of long-term charters at decent rates. NMM also is actively cutting costs and boosting fleet utilization and efficiency. The company is still paying its dividend — with a current yield of 13% — but remember, sustainability is an issue for the entire industry, so don’t bet the farm on that yield. I rank NMM a buy, with a price target of $19.

Star Bulk Carriers. If you want to make a bold play on the dry bulk sector without risking a lot of cash, SBLK is a penny stock with a lot of punch. True, the company’s first-quarter earnings were a mere shell of last year’s: $94,000 on nearly $28 million in revenues compared to $1.3 million on a top line of $29.5 million for the same quarter last year.

Like other companies in the sector, Star’s operating costs are rising, and the prospects of a slowdown in China — particularly with regard to coal and iron ore imports — are a big concern in the short term. However, the charter revenue Star has already earned covers about 86% of its projected cash needs for this year.

With a market cap of $58.7 million, SBLK is trading around 73 cents a share, 65% below its 52-week high last June. The company has negative earnings growth, so the PEG ratio and forward P/E are unavailable. It does have a current dividend yield of 8.2% — and it goes ex-dividend next Monday, meaning shareholders of record on June 13 will receive that 0.015-cent payment.[9]

Bottom Line: SBLK is my candy stock right now — cheap, with a very sweet dividend but no expectations for it to occupy a major part of an investment strategy. This is a riskier play than NMM, which is a better alternative if you want to go long in the shipping sector. Buy SBLK, with a target of $1.20.

Bail:

Eagle Bulk Shipping. This stock caught fire on Thursday, rocketing up more than 11%. But I’d chalk that up more to greater volatility since its 1-for-4 reverse stock split[10] last month (a move it had to make to keep its Nasdaq listing)than any positive development for the company or the sector. That’s a bad sign in and of itself.

EGLE has a crushing debt load of $1.4 billion, with only about $28 million in cash. It posted a widening first-quarter loss of more than $17 million (compared to a $5.8 million loss for the same quarter last year). It also had a lot of expensive new ships delivered in the midst of the shipping glut.

With a market cap of $49 million (about the price of a single new “capesize” ship), EGLE closed at $3.11 on Thursday — when adjusted for the reverse split, that’s 71% below its 52-week high last July.

Bottom Line: It will be exceedingly difficult for management to right this foundering ship. As this story[11] points out, another big challenge is short interest of more than 58% on this stock — more than six times higher than its closest peer in that regard. That means a lot of investors are betting on EGLE’s bankruptcy. I’d leave this shipping stock in port.

Genco Shipping (NYSE:GNK[12]). Genco had a tough 2011: It added 13 new ships into a clogged shipping market with depressed charter rates. It also has felt the pain of sluggish Chinese commodity shipments. And this year has started out even worse, with a first-quarter loss of $33 million compared to a $13.4 million profit for the same quarter last year.

Chalk up a lot of that trouble to poor sales. GNK’s first-quarter sales were a hair below $60 million, some 40% lower than the same quarter last year. The company blames some of its pain on banks’ reluctance to lend to dry bulk shipping companies. “We’re bouncing around on the bottom here,” GNK Chairman Peter Georgiopoulos[13] told analysts last month. “I think we’ve definitely hit bottom, and it’s just a matter of how long this bottom lasts.”

Don’t bet on the bottom ending for Genco anytime soon. With a market cap of $137 million, GNK is trading a little above $3 — 69% below its 52-week high last October. Its year-to-date return is negative 37%.

One big reason GNK is having a harder time than many of its peers: a high percentage of its long-term charter contracts expired last year. That leaves the company particularly exposed to spot market prices, which are very likely to trend lower in the next few months.

Bottom Line: GNK has a lot of new ships, a lower share of long-term charters and a higher vulnerability to spot-market rate shocks. Financing is tight as well. Look for an attempt by GNK to restructure in the coming months if sales erode further. I’d bail on GNK now.

–Editor’s note: This story has been updated to reflect the correct market cap for NMM per Google Finance on Friday afternoon and to correct the dividend amount for SBLK.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Endnotes:
  1. fears over Europe: http://investorplace.com/hot-topics/europe-in-crisis/
  2. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  3. SBLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBLK
  4. EXM: http://studio-5.financialcontent.com/investplace/quote?Symbol=EXM
  5. TBSIQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=TBSIQ
  6. PRGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRGN
  7. FREE: http://studio-5.financialcontent.com/investplace/quote?Symbol=FREE
  8. NMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=NMM
  9. 0.015-cent payment.: http://www.marketwire.com/press-release/star-bulk-carriers-corp-reports-financial-results-first-quarter-ended-march-31-2012-nasdaq-sblk-1663551.htm
  10. 1-for-4 reverse stock split: http://www.bloomberg.com/article/2012-05-22/aQj8blnBgIK4.html
  11. this story: http://seekingalpha.com/article/644571-eagle-bulk-shipping-surges-what-you-need-to-know?source=google_news.
  12. GNK: http://studio-5.financialcontent.com/investplace/quote?Symbol=GNK
  13. GNK Chairman Peter Georgiopoulos: http://www.bloomberg.com/news/2012-05-01/banks-halt-lending-to-dry-bulk-shipping-companies-genco-says.html

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