Earlier this month, Castor Maritime (NASDAQ:CTRM) sold 192.3 million shares of CTRM stock at 65 cents a share. The shares came with warrants to buy an additional 192.3 million shares, also at 65 cents.
Naturally, the shipping company’s stock tumbled on the dilution news. In the past month, CTRM has lost 44% of its value, much of it the result of the dilution.
How big was the dilution?
Castor had 707.3 million shares outstanding before the share sale. After the sale it will have 899.6 million outstanding. Add in another 192.3 million exercised warrants and the dilution works out to 54% (based on 1.09 billion shares outstanding).
CTRM Stock Sale Allows CEO to Go Shopping
With as much as $250 million in spending money, Castor CEO Petros Panagiotidis can go shopping. And shop he has.
On April 19, Castor announced its 11th vessel acquisition of 2021. This time it bought a 2015 Chinese-built Kamsarmax dry bulk carrier for $23.5 million. That’s on top of the six it acquired previously, bringing its shipping fleet to 17 vessels.
“With significant capital on hand, we continue to look for further opportunities to grow our fleet with the addition of high-quality tonnage,” Panagiotidis said.
The latest acquisition brings its deadweight tonnage to 1.5 million. The latest acquisition comes with a charter contract with 17 to 21 months left on it. Based on the company’s average daily revenue of $9,765 per vessel in 2020, the latest acquisition ought to bring in a couple of million dollars in 2021.
Extrapolate that by 17 and you’re talking about $35 million in 2021 annual revenue, up from $12.5 million in 2020.
As long as the Baltic Dry Index continues to trade at decade-long highs, these acquisitions will grow revenues exponentially over the next 12 to 24 months.
However, if you look at prices for the Baltic Dry Index from 1985 to today, you will see that except for five years between 2003 and 2008, it’s traded below where it’s at today.
If rates reverse, Castor Maritime’s shareholders will be left holding a lot of expensive merchandise that’s really difficult to move in a pinch.
So, much like the mergers and acquisitions racket, the projected future revenues of its 17-vessel fleet might not be nearly as high as anticipated. Yet it still has the costs associated with maintaining these ships.
As my InvestorPlace colleague, Stavros Georgiadis, recently said, “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.”
I think my colleague would agree that 54% dilution qualifies as a bad source of funding.
The Bottom Line
I last wrote about Castor at the beginning of April. I suggested that investors shouldn’t buy CTRM stock at any price. It’s lost 34% since then through April 23.
“I don’t see what Castor Maritime’s end game is other than buying as many boats as it can as quickly as possible and hoping to God that interest rates don’t go sky-high so it can generate enough cash flow to pay off the loans,” I wrote on April 1. “That’s not a business that’s got legs, in my opinion. I wouldn’t buy CTRM stock at 10 cents.”
Adding $250 million in highly dilutive equity financing to go along with its existing debt pushes its balance sheet risk further down the road, but it doesn’t eliminate it.
I listed many reasons why investors ought to be highly skeptical of Castor Maritime’s expansion plan. It’s as old as time itself.
CTRM stock is more like the Titanic and less like the Spirit of Australia, one of the world’s fastest boats.
Do not go down with the Castor Maritime ship. It remains a stock to avoid, in my opinion.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.