2023-11-02 08:39:43 ET
Summary
- Eagle Bulk Shipping is a Connecticut-based shipowner and operator specializing in the global transportation of dry bulk goods.
- The company reported a net income of $18 million in Q2 2023 and declared a cash dividend of $0.58 per share.
- I can't be sure we'll get an EPS beat this time either, but I think this event definitely has a higher probability than is currently priced in.
- Despite inherent risks in the shipping industry, I maintain a "Buy" rating on EGLE stock due to a positive industry outlook and potential for higher dividends.
My Coverage History And Updated Thesis
I first wrote about Eagle Bulk Shipping ( EGLE ) in October 2021 and didn't update my Buy thesis until May 2022 - here's how my recommendations performed to date:
I can’t say I’m pleased with EGLE's total return over the past few quarters, but I’m not disappointed either: the stock follows the Baltic Dry Index as it reflects the drivers of the company’s earnings, and given the volatility of that underlying in recent months, EGLE, like many other bulk shippers stocks, has been relatively stable. Therefore, I decided to turn to EGLE again to understand whether the company is an interesting investment target today.
In my opinion, the current state of the industry and EGLE's idiosyncratic features still make the stock a "Buy" for a long-term investor.
My Reasoning
Eagle Bulk Shipping Inc. is a Connecticut-based shipowner and operator with a base of operations in the Marshall Islands, specializing in the global transportation of dry bulk goods, serving miners, traders, and end users. They possess a fleet of 52 medium-sized dry bulk vessels known as Supramax/Ultramax, collectively capable of carrying 3.21 million tons of dead weight. These vessels have an average age of ~10 years as of September 2023. EGLE is the largest owner of scrubber-fitted ships in the midsize dry bulk segment globally.
In Q2 2023, Eagle Bulk Shipping reported a net income of $18 million, which translates to $1.42 per share on a basic level, beating the Street's consensus by a healthy margin . As part of its capital allocation strategy, the company declared a cash dividend of $0.58 per share, which was way lower than last year. Apparently, this dividend reduction was the reason for the sell-off in EGLE's share price - in any case, these two events correlate well:
From a value play paying very generous dividends and trading at a discount to net asset value, EGLE has become simply a value stock in a cyclical industry, with Wall Street analysts forecasting a dividend range of 2.2% to just over 4.3% over the next few years.
In my opinion, however, it is too early to forecast such a modest dividend for 2 years in advance.
In Q2 EGLE successfully completed a significant crew management transition on 18 of their vessels, which improved crew diversity and sourcing. Additionally, the company executed the purchase and sale of vessels during the quarter, resulting in a levered IRR of ~70% over the past 24 months.
They also executed an upsize and extension of their credit facility during the quarter, which increased their total borrowing capacity by $175 million. The company's total debt outstanding was $517 million, and after considering interest rate swaps in place, the all-in weighted average interest rate on their total debt position was ~5.25%. In general, interest expense in Q2 was covered about 4 times by EBIT (the TIE ratio), so I don't think EGLE carries significant credit risk nowadays.
In terms of performance, EGLE outperformed the benchmark BSI index with a net TCE of $14,434 per ship per day in Q2. The challenges faced by the market during this time were attributed to weak demand growth in China and ongoing congestion issues.
In general, freight rates for bulk carriers have been quite volatile in recent weeks, as we can see from the Baltic Dry Index .
During the latest earnings call , EGLE's management emphasized that their outlook for the dry bulk industry remains positive, driven by strong supply-side fundamentals and favorable future supply dynamics. They noted the continuing low order book and the expected increase in the average age of the fleet, indicating a potential surge in scrapping older vessels in the coming years. From what I see in the company's IR materials, their expectation is for the demand for dry bulk shipping services to grow by 3.3% in FY2023. This growth is attributed to an increase in the total ton-miles of cargo to be transported, which can result from goods being moved over greater distances. In essence, the demand for shipping services is projected to rise because more cargo is expected to be transported over longer routes, contributing to increased ton-miles and, therefore, higher demand for shipping capacity.
So, putting together the forecast about the low orderbook and the expected surge in demand, I assume that the current low freight rates are a temporary phenomenon, even in a global recession scenario.
But demand for different bulk commodities will behave differently. For example, in FY 2024, BIMCO analysts expect demand for coal to decline and demand for grains to increase:
And this is where EGLE comes in, whose entire fleet, unlike other industry peers, consists of Supramax/Ultramax vessels, which have a smaller capacity than say Capesize ships. It's not common for Capesize bulkers, which typically carry minerals, to move grains, given the technical challenges and commercial benefits. Therefore, in theory, the EGLE fleet should be the most protected from rate fluctuations due to its size.
Risks To Consider
Investing in EGLE stock entails various inherent risks that you, as a potential investor, should be aware of:
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Cyclicality: The shipping industry is characterized by cyclical trends, where fluctuations in freight rates and demand are closely tied to the global economic landscape. EGLE's financial performance is susceptible to these cyclic variations.
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Competition: The shipping sector is marked by intense competition, featuring well-established industry participants. EGLE contends with the competitive pressures that can exert a downward influence on its freight rates and profit margins.
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Vessel Operating Costs: EGLE's day-to-day operational expenditures, encompassing elements such as fuel, maintenance, and repairs, have the potential to be significant. Unforeseen cost escalations could have an adverse impact on the company's overall profitability.
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Newbuilding Risk: EGLE has pending orders for the construction of new vessels, and any potential delays or cancellations in the delivery of these vessels may disrupt the company's growth strategies.
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Segment Concentration: EGLE exhibits a pronounced concentration within the dry bulk shipping segment. This concentration exposes the company to sector-specific risks, including susceptibility to fluctuations in demand for dry bulk commodities.
Your Takeaway
In August Eagle Bulk Shipping anticipated a market recovery in Q3, and they had ~67% of their available days fixed at a net TCE of $10,900. In recent months, Wall Street EPS forecasts have been slashed : now consensus expects negative EPS of -$0.86 for Q3 FY2023:
The last 2 times, however, we have seen downward pressure on EPS estimates lead to the misguided conclusion of analysts whose forecast EGLE easily exceeded :
The company reports on November 2nd, 2023 . I can't be sure we'll get an EPS beat this time either, but I think this event definitely has a higher probability than is currently priced in. It also seems to me that longer-term dividend forecasts also have a strong chance of being too low as well. Therefore, despite the many risks with EGLE, I am sticking with my previous Buy rating.
For further details see:
Eagle Bulk Shipping: Patience Should Pay Off