Published:
October 20, 2008
Knowing when to sell a stock can be one of the most difficult
decisions that investors face. We all make the mistake of trying
to squeeze a few extra dollars from a winning trade, only to
wait too long and watch those profits disappear when the shares
reverse course.
Fortunately, my timing was just right with Eagle Bulk Shipping (Nasdaq:
EGLE, $9.43)
In fact, I decided to pocket a sizeable +45% gain on the stock
back in May. just around its high-water mark. Its tumbled since
then, and the dry-bulk shipper is once again
looking very tempting.
Some of the losses in EGLE shares since we departed
have been well-founded. Signs of an economic slowdown in China
(which has a ravenous appetite for coal, cement, and other raw
materials) have weighed down this sector like an anchor. China
has also instituted a damaging boycott of Brazilian iron ore
over a disputed price hike. Meanwhile, the Baltic Dry Index, a
common barometer of shipping rates, has slipped to a new five-year low.
However, Chinese steel makers can only rely on their iron ore
inventory stockpiles for so long; eventually they will have to
bring in new supplies from Brazilian mines -- meaning increased
demand for dry-bulk carriers. Additionally, I think much of the
slowdown in overseas trade has been exaggerated.
On the supply side, the credit crunch is making it
tougher for shippers to have new vessels built. In fact, three
shipyards in South Korea just had to halt the construction of 40
new ships due to lack of funding. Smaller increases in shipping
capacity should help keep rates firm.
Let's not forget that Eagle isn't really dependent
on current shipping rates in the spot market. The company leases
out its vessels under long-term time charter contracts at fixed
daily rates. Last quarter, those time charter revenues jumped
+26% to $39.2 million -- with profits rising by a similar
percentage.
Over the last three months, 99.9% of Eagle's available fleet
days have been utilized. Just as quickly as that cash flowed in,
management sent it right back to shareholders, with $23.4
million worth of dividend payments -- a generous $0.50 per
share.
It's also worth noting that the firm's ambitious expansion plans
are proceeding full steam ahead. The first of 35 newly built
ships just joined the fleet and was immediately booked on a
lengthy 10-year charter. Management also dished out some cash to
acquire two additional Supramax vessels, and one of those (Goldeneye)
has already inked a 1-year contract at $61,000 per day.
Meanwhile, an existing ship in Eagle's fleet (Cardinal) also
signed a new charter for $62,000 per day. The vessel was open
for business after an expired contract, and the new rate is
about +120% higher than the old one.
With a guaranteed base of contracted revenues and lucrative
profit-sharing agreements in place, Eagle is an all-weather
operator capable of creating value for shareholders under any
condition. I think the current storms will subside and favorable
supply/demand fundamentals will drive shipping rates higher in
the year ahead.
Either way, I expect the company to continue churning out stable
cash flows and returning that wealth to shareholders. And thanks
to this precipitous slide, the $2.00 annual distribution now
represents a whopping yield of
21%.
Best of all, the shares would have to sail about
+197% to reach
my fair value estimate of $28.
Current concerns in the shipping business aside, Eagle shares
have sunk too far, too fast.
Once sentiment improves, the shares should make their way back
into the $20s.
Nathan Slaughter
Editor
The ETF Authority
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