Castor Maritime (NASDAQ:CTRM) is a shipping company, founded on Sept. 12, 2017 and based in Limassol, Cyprus. The company states that “Our primary goal is to grow our fleet through acquisitions of new and modern vessels.” Is CTRM stock worth buying now and should you watch it?
One of my favorite movie quotes ever is “Life is like a box of chocolates. You never know what you’re gonna get,” from the great movie Forrest Gump. Who knew that I would be assigned to write my investment thesis on a shipping company stock, as in the past I had my own, family business, a shipping company in Greece. And interestingly enough it was in the same sector, dry bulk cargo as is Castor Maritime.
So I happen to know from personal experience how shipping companies work, what are the risks of this business.
CTRM Stock: The Risks to Consider
Shipping companies are very capital-intensive businesses, as vessels cost millions to acquire, and there are a lot of expenses, from fuel oil to insurance to unexpected claims that may arise. Shipping is also a very cyclical business sector. And is responsible for the majority of international trade and shipment of goods.
There are times when, depending on the business conditions, profits may be substantial, but there can be times when profits can be non-existent and maritime companies can be subject to accumulating losses. It all breaks down to what the freight rates are, which depend on the global state of the economy, business cycles, and specific circumstances such as the recent Suez canal incident which caused a short-term but very expensive turbulence to the shipping industry and highlighted the need for finding other logistics solutions.
After all, as Yemisi Bolumole, associate professor of supply chain management at Broad College of Business, Michigan State University, wrote in an email to InvestorPlace, “Given the broader geographic reach of the flows that transit the Suez Canal (vis-à-vis the Panama Canal for example), we should expect to see ripple effects of the recent backlog and congestion created by the Ever Given across a broad set of industry sectors.”
Castor Maritime, according to information from its website, has a management agreement with another company. This means that it has a contract that allows the other company to operate, and make strategic decisions on behalf of Castor Maritime. While this type of business is not unusual in the shipping sector, giving the management to another shipping company can often spell trouble. A lot of trouble.
Many times there are conflicts of interest, and the management company may not make maximizing the profitability of Castor Maritime its top priority. The management company receives a monthly salary based on the contract. If needs for maintenance costs arise, which arise very often and are not cheap in most cases it turns to the other company to ask for money. This means that companies such as Castor Maritime which own vessels must have very good liquidity at all times.
Checking the financial health of Castor Maritime for the past four years via data from MorningStar, there is a large deterioration of the liquidity. That may spell trouble soon. In 2017 the Current ratio and Quick ratio were 6.02 and 5.69 respectively. In 2020 the numbers were 1.24 and 1.08 respectively.
The higher the numbers for these ratios is, the better the liquidity is for the mentioned company.
The largest risks now about Castor Maritime are the volatility in the freight rates and its revenue and the free cash flows it has and may have.
If the freight rates continue to rise, this is positive news for the company. And the company is now risking on this too. It has agreements called time-charters that lock in the daily freight rate it can earn for its vessels for some period. But in case there are damages or unexpected expenses this guaranteed daily revenue is no longer guaranteed and can be reduced for some days.
Second, in the case of Castor Maritime having time-charter agreements for lengthy periods, it could not be the best-case scenario for earning revenue. Why? The answer is that you are locked in a specific daily rate as income, while contract rates on the spot market may explode higher later. That means losing the potential of earning more.
Of course, if rates collapse, there can be a default of the other party now paying too much, so Castor Maritime has increased the chances of not maximizing the revenue it can earn during this period of fixed contracts. Plus having the risk of potential defaults on its contracts does not seem always the best idea for running the shipping business.
Castor Maritime: An Aggressive Fleet Expansion Comes With Its Dangers
Buying vessels need a lot of capital. And that can mean huge capital expenditures and negative free cash flows. This is the case for Castor Maritime. In 2018 it had a free cash flow of nearly $1 million. In 2019 and 2020 it had free cash flows of -$15 million and -$38 million respectively.
In a press release in early March 2021, Petros Panagiotidis, chief executive officer of Castor, commented, “We are very happy to announce our seventh vessel acquisition in 2021 with the addition of another Kamsarmax dry bulk vessel, our fourth, to Castor’s fleet. Our focus remains on deploying our capital and growing our fleet through timely acquisitions of vessels across shipping segments.”
Are Financial Results Inspiring?
The answer is no. Studying the financial results for the full 2020 year these highlights are notable: Revenues of $12.5 million, up from $6 million, or a 108% bump, year over year. The net loss of $1.8 million, “which includes one-off non-cash interest expenses of $1.1 million,” a notable divergence from net income of $1.1 million the prior year. And EPS of -3 cents, far below the 31 cents the previous year.
Expanding at such an aggressive rate means a lot of risks, such as not being profitable, and finding sources of funding that are not good news for shareholders.
In 2017, 2018, and 2019, the company had a net income of $1 million. In 2020 it had a loss of about $2 million.
Stock Dilution: Providing Finance but Destroying Value to Shareholders
In 2018 Castor Maritime had two million and four hundred common shares. In 2020 it had about 131 million common shares. This massive stock dilution is very bad news for the valuation of CTMR stock. It has deteriorated too much.
Is CTMR stock a stock to buy now? The answer, according to my research, is no. It is way too expensive. If the new acquisitions bring more revenue and mostly profits, then we can reevaluate the stock. But for now, I am not excited at all by the valuation and the profitability. Loving low-priced stocks is not always bad, but in this case, stay away.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.