PANL - Eagle Bulk Shipping: A Mid-Sized Vessel Specialist With An Edge

Summary

• Among the companies specializing in the mid-sized vessel category, EGLE is the company with the largest fleet.
• The company has been able to hold 70% of their Q4 TCE per day fixed at very similar rate as in Q3.
• EGLE scores higher on profitability ratios compared to its peers, making it an attractive choice for investors looking to invest in this sector.
• Based on an EV/EBITDA valuation, EGLE stock is currently undervalued at around 40% compared it its peers. We rate it a buy based on this ratio.

Introduction and Background

Eagle Bulk Shipping Inc. ( EGLE ) is one of the leading companies within the mid-sized vessel dry bulk shipping universe. They have an impressive fleet of 54 fully owned vessels, including 26 Supramax and 28 Ultramax vessels, EGLE has positioned itself to be a top player in the mid-sized vessel dry bulk shipping universe. Their fleet is the largest of its kind among its closest competitors, making them a standout choice for investors.

The size of its fleet is not the only attribute that sets EGLE apart from its competitors- it is the strategic focus on mid-sized vessels. By specializing in this vessel type, EGLE is equipped to transport all major and minor bulk types, allowing them to withstand declines in demand for any commodity. Additionally, 48 of their vessels are fitted with scrubbers. Due to this, EGLE can generate additional value and fuel savings.

The average age of their fleet is only 9.5 years, as such, EGLE is well-positioned to be a top player in the dry bulking industry for years to come. Furthermore, EGLE has an attractive EV/EBITDA ratio at its current price, which is why we rate this stock as a buy.

In addition, it's worth noting that EGLE's vessels are equipped with onboard cranes. This allows the offloading of cargo without the need for on-shore port equipment or infrastructure. This is a distinct advantage for a company in the dry bulk shipping industry.

Risks and Market Outlook

As we previously alluded to in our post about Star Bulk Carriers (SBLK), the dry bulk market has faced and will continue to face many challenges in the short term. These risks include a continuous decline in the Baltic Dry Index ((BDI)), fluctuations in Chinese demand, rising operating expenses, and tensions between China and the US.

When we examine the BDI, we immediately notice that the current levels are not far off from those observed during the pandemic in the spring of 2020. Additionally, the BDI has experienced a decline for eight consecutive weeks, with no apparent signs of an impending reversal.

Some may argue that the BDI is close to or has bottomed. However, the short-term trend has strong downward momentum with no apparent signs of slowing down, as can be seen in the chart above. The only obvious catalyst for the BDI is an increase in Chinese demand, which could soon become recognizable in the data. However, the effects of the Chinese reopening can take several months to come to fruition. As such, it could take some time before we see a significant increase in demand from China. As seen in the figure below from, almost 40% of the volume in the dry bulking sector was destined for China in 2022.

In case China will start to increase its imports in the future, it could only be a matter of time before we start seeing the BDI increase again. However, we should not expect to see the same levels as we saw back in 2021 since we do not have the same global supply crunches and these aren’t likely to come back anytime soon, as this was a one-off event caused by Covid-19 lockdowns .

Another important geopolitical event to be aware of is the current friction between China and the United States. With the recent balloon affairs , tensions between the two superpowers are relatively high, and we could see economic retaliation from both nations in the form of tariffs. Tariffs usually suppress demand and could hinder a return to a normalized Chinese market, as we saw back in 2018 and 2019 .

On a global scale, the IMF projects emerging markets and developing economies to grow by 4% and 4.2% in 2023 and 2024, respectively, with the global economy growing by 2.9% and 3.1% in the same years. Growth should very well lead to an increase in dry bulk commodities.

EGLE: Setting Sail Into A Profitable Fourth Quarter

As we pointed out in our previous article about Star Bulkers Carriers Corp. , the whole industry suffers from a significant decline in TCE which is having an effect on the revenues within the dry bulk industry. Meanwhile, operating costs have significantly increased, dragging down company profits. This is mainly due to the fact energy cost has increased after the Russian invasion of Ukraine , as well as rising commodity prices causing maintenance of their fleet more costly.

Readers of our previous article will be familiar with the chart above, where we see that TCE rates have declined and are now at a level that we haven’t seen since late 2020. The TCE is either bottoming out or in case of a recession we could see a further decline.

Although the TCE has declined over the past year, EGLE has kept its TCE relatively consistent between Q3 2021 and Q3 2022, while its OPEX + G&A has only increased slightly. This can be crucial for their Q4 earnings, which will come out in just a few weeks, on March 2nd .

The costs and TCE is also shown in EGLE's Q3 2022 presentation, with a slide from the presentation presented below:

In addition, they have managed to fix 70% of their voyages for Q4 2022 at an average rate of $25,040, well above the Q1 2021 level. As shown in Figure 4, TCE prices have fallen well below $20,000. Therefore, securing 70% of their TCE at such a high price will likely be profitable for EGLE.

Furthermore, EGLE sees the Supramax and Ultramax global fleet growth slowing in the coming years, which can be seen in the chart below.

As the growth of the dry bulk shipping fleet does not align with the global increase in demand, there is a possibility of a slight supply crunch in the years to come. As a result, it could lead to higher TCE rates and a potential return to the dry bulk paradigm observed in 2021 and 2022. Investors interested in dry bulk shipping should take note of this, as it could indicate profitable times ahead.

In summary, the dry bulk shipping industry has experienced a significant decline in TCE rates and increased operating costs, leading to a decrease in company profits. However, EGLE has kept its TCE rates and operating costs relatively stable, which could lead to good Q4 earnings. Additionally, with the growth of the dry bulk shipping fleet not aligning with the global increase in demand, there is potential for a supply crunch in the coming years, which could result in higher rates and, thus, better returns.

Financials

Eagle Bulk Shipping has had a two-year period with incredible growth on its top line, with a constant positive YoY growth every quarter since the beginning of 2021, as seen in the table below.

Over the past 8 years, EGLE has been able to show consistent growth in its revenues. But, the company experienced some difficulties in 2019 and 2020 – understandably so given the macro fundamentals at this time (slight economic downturn on a global scale in 2019 and COVID-19 in 2020). Nevertheless, based on the TTM estimates, 2022 is expected to be an 8-year high for the company in terms of revenue, free cash flow, operating income, and operating cash flow. Unfortunately, there are a few things not to like about this growth. Their operating margins have decreased slightly since 2021. This is still well above 40%, which can be considered more than satisfactory. We don’t see this as a significant issue.

If we look on a 5-year basis, EGLE has 5-year revenue CAGR of 26.04% and a 5-year operating income CAGR of 168.05%. These are both very attractive numbers for potential investors. However, it is expected that in 2023 the growth will come down slightly due to the factors mentioned above and confirmed by this IMF report .

EGLE has taken measures to slow down their capital expenditure significantly since 2021, with capital expenditure now at the same level as in 2016. We believe this is more than likely in anticipation of a global economic slowdown or even a possible recession in 2023. As mentioned before, this money has been prioritized to bolster their balance sheet instead.

Comparing them to their closest competitors on several profitability metrics, you can see why we prefer EGLE over other companies in the dry bulking sector.

EGLE's margins are just over the average compared to its competitors, which does not necessarily stick out but is well within the realm of good results. The standout metric for EGLE is their impressive FCF yield, which, based on their Q3 2022 earnings, is calculated to be almost 42%. In addition, its EPS outperforms its competition quite clearly, which should appeal to possible investors.

Another rather appealing metric of EGLE truly shines in their ability to generate returns on their assets, equity, and investments compared to their competition. Looking at table 4, the reader will see just to what extent EGLE triumphs over its competitors.

Again, EGLE seems to be a more attractive company when we compare it to its peers based on ROE, ROA, and ROIC. We believe EGLE should be included in an investor’s portfolio if they are interested in exposure to the dry bulk market.

Given the desirable profitability ratios, you can see that EGLE is the most attractive among the mid-size specialized dry bulk shipping companies. Furthermore, given that they are currently trading at an EV/EBITDA ratio of 2.43, with the average among the included companies being 3.48, EGLE is presently trading at a 43.5% discount compared to its peers. Thus, we believe this stock is a buy based on the aforementioned EV/EBITDA ratio.

When examining EGLE's financials, it is also essential to assess its ability to pay off its debts, particularly given the potential for headwinds in the short term within the dry bulk sector. Their trailing twelve-month current ratio is 2.06, while their quick ratio is 1.86, meaning they should have adequate capabilities to pay off short-term debt and remain relatively robust during a potential sector-wide crisis.

EGLE’s management turned their attention to further building their assets, which went from $1.02B in Q1 2021 to $1.26B in Q3 2022. In the meanwhile, they reduced their liabilities from $539.76M in Q1 2021 to $436.79M in Q3 2022. Furthermore, they have been able to keep their dividend yield relatively high. Their dividend yield was 8.9% in 2021 and grew to around 12.50 in 2022.

Technical Analysis

From a technical standpoint, EGLE does not look like an especially attractive stock at the time of writing, as we recently reached a resistance level at approximately $58. This will very likely continue to be a big resistance. However, there is a real possibility that this stock could break through this short-term resistance.

If this is the case, we could see some decent upside, even in the short term. The stock has previously bounced off the 20 EMA on its way up from the lows in September and October, which is why we see the next small level of support at $56.25. The next big level of support is the 200 EMA, which is currently at the $51.74 price level.

Unfortunately, we expect the stock price to continue a downward path in the short term. However, on a long-term basis, this stock has great potential and at this moment in time, seems to be a better option compared to its peers. Moreover, with China re-opening, we could soon see a significant catalyst for the dry bulking market, which could make this stock gain momentum and thus break an upcoming resistance level.

The 5–year chart tells somewhat of a similar story, where we recently broke a support level. As a result, EGLE could have room to go further up, nearing the 200 EMA on a weekly time basis. This can prove to be a pivotal area for this stock. China will likely be the trigger that could potentially drive this stock above the 200 EMA. If this fails, we may see EGLE back around the current price for the foreseeable future.

Conclusion

Like any other dry bulk shipping company, EGLE faces short-term headwinds in the form of a potential recession. As a result, investors should potentially prepare for the stock price to fall further in the short term. However, we also see potential for long-term profits. This is particularly true as global demand, especially from China, starts to recover. Additionally, if global fleet growth remains subdued in 2023 and 2024, this could be a positive for the industry.

Compared to its peers, EGLE appears to be undervalued. This is expected to remain the case for the near future since EGLE has locked in their TCE rates at higher levels than the market trends in Q3 2022 and is expected to do so in Q4 2022 as well. This is a positive sign for the company, as it indicates that they have secured more favorable contracts, which should boost their profitability over their closest competitors. Additionally, EGLE has bolstered its balance sheet and has remained highly profitable. These factors indicate that EGLE is a strong buy for any long-term investor.

We believe that EGLE will stand clear of its competitors, making it one of the better stocks in the dry bulk shipping industry. With a track record of strong financial performance, a strong balance sheet, and favorable contract arrangements, EGLE is well-positioned to weather any near-term headwinds and continue to deliver solid returns for investors over the long term. Therefore, we recommend that any investor interested in the dry bulk shipping industry considers adding EGLE to their portfolio.

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