What are investors who buy Castor Maritime (NASDAQ:CTRM) stock purchasing?
The simple answer is: a dry-bulk shipping company, one that is growing aggressively via vessel acquisitions. Just in the first four months of 2021, Castor’s fleet has grown from six ships to 24.
That’s true as far as it goes. But taking the broad view, what they’re buying is the ability of Castor Maritime’s management to create value through that strategy.
And even with CTRM stock down sharply from its highs, investors are paying up for the privilege. Castor Maritime remains valued at a substantial premium to the money it’s paid for vessels. (Most of that money has been spent in the last four months.)
The company’s management may be able to create such value, and the market is clearly optimistic about the industry at the moment. That combination might be enough to boost CTRM stock, but I’m highly skeptical that it will be.
The Asset Premium
In terms of the case for CTRM stock, there are two key fundamental points to consider.
First, the stock still trades at a reasonably heavy premium to the price that the company paid for its fleet. According to press releases and filings with the SEC, the 24 vessels it acquired so far cost about $302 million.
At the current CTRM stock price of 47 cents, Castor Maritime has a market capitalization of $423 million. Factoring in the acquisitions and a recent equity offering, the company actually has a modest amount of net debt at the moment, giving it an enterprise value of around $440 million.
That’s a significant premium: the market is saying the company is worth about 45% more than its ships cost.
There doesn’t seem to be a good justification for that difference.
The Thin Case for CTRM Stock
Shipping rates are rising. Executives at two big dry bulk shippers, Star Bulk Carriers (NASDAQ:SBLK) and Golden Ocean (NASDAQ:GOGL) both forecast higher rates during their earnings calls in February.
But those higher rates were factored into the prices of most of the ships acquired by Castor Maritime , as 80% of the cash that it’s spent on new vessels has been appropriated in the last several months. Surely the sellers of those vessels knew that shipping rates were headed higher. So it’s difficult to argue that rising rates have made the vessels more valuable after they were acquired.
Another possible explanation is that Castor is an excellent shipping operator. That seems unlikely. Coming into the year, Castor was hardly known or noticed by most investors. Its six-vessel fleet wasn’t close to profitable, and CTRM stock had dropped from $4 to just 18 cents.
But the same traders who sent GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) “to the moon” for whatever reason became excited by Castor as well. A huge rally on gigantic volumes allowed Castor to sell tremendous amounts of stock; its share count has ballooned from 131 million at the start of the year to 900 million currently.
The evidence doesn’t suggest that Castor is a best-in-class operator. That’s not to say it’s a bad operator (we can’t really prove that either). But it’s clear that the stock’s $140 million premium to the value of the company’s ships can’t be justified by its financial results.
A Shrewd Dealmaker?
The valuation of CTRM stock could also be justified if Castor Maritime was shrewdly making incredible deals.
But the company’s management team is incentivized to make these deals. Its CEO, Petros Panagiotidis, gets a 1% commission on the purchase price of every vessel that the company buys. Already in 2021, he’s made $2.4 million from those commissions. Another company he controls manages the ships and receives, among other compensation, $250 per vessel per day. Another company run by Panagiotidis’s sister gets $600 per vessel per day.
Panagiotidis does own a decent amount of CTRM stock (including preferred stock that gives him 100% voting power), so he’s not incentivized to buy any ship at any cost. But he is incentivized to get deals done — and perhaps not necessarily just the best deals.
And so the justification for Cator’s stock to trade above the value of its assets just isn’t that strong. In fact, we don’t see such a premium in other stocks in the sector. Star Bulk Carriers trades modestly above its book value, but Golden Ocean and Costamare (NYSE:CMRE) both trade at discounts to their book values. We’ll have to see exactly what Castor’s book value will be at the end of Q2, but its price-to-book multiple probably sits around 1.5 times at the moment.
Those multiples are low in part because experienced investors understand the incredible risk of investing in dry bulk shippers. In the first half of the last decade, Star Bulk, Golden Ocean, and Costamare destroyed nearly all of their shareholders’ value. The DryShips debacle was even worse.
Maybe this time will be different for shipping stocks. The rally across the sector suggests some investors believe that. But those bulls would be better off with more experienced operators than Castor — and more reasonably priced names than CTRM stock.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
