After Castor Maritime’s (NASDAQ:CTRM) spectacular ride to as high as $19.50 in February, the stock slumped since then. CTRM stock is not getting many bids after a one-for-10 reverse stock split on May 21. More recently, its first-quarter earnings report attracted investors again.
What are the marine shipping firm’s prospects like from here?
Q1 Net Profit Lifted CTRM Stock
CTRM shares rallied on June 3 after the Cyprus, Limassol-based firm posted $1.1 million in net profit. Revenue of $7 million is up 159% from last year’s $2.7 million. It earned 2 cents a share, compared to a 68-cent loss last year. Cash and restricted cash rose to $64.2 million, up from $9.4 million last year.
Castor acquired 20 vessels so far this year in the dry bulk and tanker segments. As of June 2, it took delivery of 14 vessels. It has six more acquisitions left by the fourth quarter of this year. Tallied up, Castor will have 26 vessels and an aggregate capacity of 2.2 million deadweight tonnage (dwt).
Chief Executive Officer Petros Panagiotidis said, its fleet will allow “us to benefit from the ongoing strong demand for dry bulk transportation services as evidenced by the recent charter fixtures of a number of our dry cargo vessels, as well as from a potential future recovery in the tanker market.”
In Q1, the revenue strength supports the CEO’s optimism. Its fleet increases its available days to 214.
Opportunity
Castor’s sharply higher available days will also lift its revenue potential. The company defines available days as ownership days fewer off-hire days associated with major scheduled events. So, investors may assume low unscheduled repairs and vessel upgrades. As fleet utilization increases this year, revenue and profits will grow.
Contributor Will Ashworth wrote that CTRM stock is not a buy if bulk dry shipping does well. Still, this bullish view centers around Reddit’s attention on the shipping stock. Ultimately, the company must report growing time charter revenue outpacing operating expenses.
Vessel operating expenses accounted for $3.3 million in expenses. Depreciation and amortization also more than tripled to $1.08 million. Posting just 2 cents in earnings a share, valuations are highly unfavorable. Furthermore, the company has $23.73 million in long-term debt, up from $11.08 million.
Castor’s aggressive acquisitions are leveraging its precious balance sheet. The stock has no room to appreciate with its heavy debt on the books. The shipping industry is highly cyclical, too. And the strategy to buy ships at potentially the peak is a risk.
Risks
Castor may have picked up more ships than it can pay. It will need to raise cash in the near term. It will do so by raising more debt or selling shares. In either case, markets will punish shareholders if the shipping business slows.
Fortunately, selling equity above net asset value and buying the vessels mentioned at net asset value is a good strategy. The dry bulk charter market is showing signs of recovery. This will improve as the Covid pandemic abates globally. There are no signs of a re-emergence of another wave, either. This suggests that vessel revenues may rebound this year.
Castor faced headwinds in the fourth quarter in the tanker charter market. So, its initial foray into the market is a bet that the sector will recover.
In the table above, Castor has a low value score. Investors may consider many other better run firms that offer better value.
Castor needs to post growing profits before its score rises to at least 50/100. That will take more than one quarter.
Your Takeaway
Castor’s reverse split is a negative event that the market is still absorbing. The company needs to post several quarters of increasing revenue. If it does, it will win back some investor confidence.
Only after at least three to six months might shares build a sustainable uptrend. Until then, keep this stock on the watch list.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
