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Eagle Bulk Shipping (NASDAQ:EGLE) has a fleet of 53 dry bulk carriers focused on the Ultramax and Supramax segments. On May 6, he announced some pretty impressive first-quarter results. However, demand for bulk shipping is high and tariffs are high for all companies in the segment. I own shares in Star Bulk (SBLK) that I started accumulating when the industry was struggling to make a profit, and it’s the only shipping stock in my portfolio. Most of the stocks I own are in pharmaceutical companies, including clinical-stage companies that don’t yet have commercial sales, and that sector has shrunk significantly over the past year. This caused my Star Bulk to exceed my old portfolio rule of no more than 10% in a stock by a massive margin (today it’s almost 50% of my portfolio). I’m watching Eagle partly to better understand the trajectory of the dry bulk shipping industry, and partly because it might make sense to take some of the massive dividends generated by Star Bulk and put them into Eagle, which also pays a substantial dividend. In the main part of this article, I will report my findings on Eagle and make some comparisons to Star Bulk. Then, I’ll use this information to argue that Eagle Shipping probably still has significant advantages.
Characteristics of the eagle
Eagle Bulk Shipping is headquartered in Stamford, Connecticut, USA. Its vessels range in size from 50 to 65,000 metric tons (deadweight) and typically carry commodities such as coal, grain, iron ore, fertilizers, cement and other minor bulks.
Eagle’s stock, like that of all bulk shippers, tends to be volatile, but more or less tracks the Baltic Exchange Dry Bulk Index or BDI, or more specifically a sub-index, the Baltic Supramax Index or BSI . The stock price gave the impression that the company was in trouble at the start of the pandemic, falling from nearly $30 at the end of 2019 to less than $10 per share at times in May 2020. Then the ship righted as demand returned and climbed in 2021 and shipping rates were increased. Despite the volatility, Eagle’s stock price has been above $60 for the past few months and is above $70. Additionally, Eagle has launched a substantial dividend in 2021, which will be discussed in more detail below.
Eagle specializes in two of the main classes of mid-size bulk carriers, Ultramax and Supramax. For these categories, they have one of the largest fleets in the world. Notably, Eagle does not own Capesize vessels, which are primarily used for iron ore and coal going directly from Brazil, Australia and other major sources to, primarily, China. But they carry smaller loads of coal and iron ore to less intensive users. If you look at slide 7 of the Eagle April presentation, you can see that the emphasis on the Supramax category contrasts with that of Star Bulk, Golden Ocean and others in their peer group. Since minor bulks are more varied, Eagle is not as prone to single points of failure as happens to iron ore and coal carriers when major mines or ports are closed. The Eagle cargo mix is featured on slide 16 of the presentation just mentioned. Note that there is seasonality, as coal is generally more in demand for heating in winter and grain is shipped after harvest.
Eagle Q1 2022 results and dividend
For the first quarter of 2022, Eagle Bulk Shipping reported revenue of $184 million, up 90% from $97 million a year earlier. Net income was $53 million, more than five times the $10 million reported the previous year. Diluted GAAP EPS (earnings per share) was $3.27, compared to $0.84 a year earlier. Cash flow from operating activities was $42 million. Cash and cash equivalents ended at $84 million, down slightly from $86 billion a year earlier. As is generally the case in the shipping industry, where ships are financed, there was long-term debt of approximately $330 million. However, it was against vessels detained for a value of 900 million dollars. Under GAAP, book equity was $694 million.
The dividend program was launched in the fourth quarter of 2021. For the first quarter, a dividend of $2.00 per share was declared. This dividend was for shareholders of record on May 16, 2022 and is due May 25, 2022. The dividend used $26.8 million in cash, or approximately 50% of net income. The announced dividend target is at least 30% of net income, but this appears to be annual income, with the dividend maintained at nearly $2 per quarter. Rates and net income tend to be seasonal in the industry, lower in 1H and higher in 2H.
Projecting at $8.00 per year, at a price of $69.00 (at the time of writing), the return is 11.6%. Also note that the market capitalization is currently close to $946 million.
Eagle Bulk vs. Star Bulk
As I said above, of the bulk shippers, I am most familiar with Star Bulk, and I own its stock. While Star Bulk has a few ships in the Ultramax/Supramax category, its main capacity is in the larger Panamax and Cape categories. It is much more responsible for transporting coal and iron ore, although it does a substantial trade in small quantities. I’ll use Q4 2021 for some points of comparison. As you read these Q1 2022 results for Star Bulk, if you want an updated comparison.
Eagle Bulk had sales of $185 million, while Star Bulk had sales of $500 million. GAAP net income was $87 million for Eagle and $300 million for Star. Thus, net income as a percentage of sales was 47% for Eagle and 67% for Star. This could argue that Star Bulk was the most efficient carrier, at least in Q4 2021. I think they’re both efficient carriers, but Star Bulk’s large size gives it an edge, especially when rates shipping rates are as favorable as they were in the fourth quarter of 2021.
Although Star Bulks’ dividend plan is also transparent, it is a bit more complicated and varies more from quarter to quarter. The dividend for the fourth quarter (paid in the first quarter) was $2 per share, which gives a yield of 25% when the stock price is $32 per share. Following seasonal trends, in 2021 the dividend was highest in Q3 and Q4 and lowest in Q1 and Q2; I expect the same pattern this year. To compare dividends, I believe the most balanced approach is to use those received from Q2 2021 to Q1 2022 by Star Bulk, which paid $4.25 per share and yielded 13.3% at a price of $32 per share. For Eagle Bulk, the regular quarterly dividend of $2.00 equals 11.6%. For dividends, at least for now, Star Bulk is a bit more rewarding. Keep in mind that unpaid net income in the form of dividends can also help shareholders by paying off debt or developing or maintaining the fleet. Yield also depends on the price at which the stock is bought, so dips increase yield. Yields are close enough today that another day Eagle’s will be higher. In addition, there is a risk that bad shipping rates will at some point lead to losses and a reduction or even cancellation of dividends.
Long term outlook
Barring a major global depression, the outlook for bulk shipping, and in particular Eagle cargoes and prices, is quite promising. This does not mean that I expect prices to significantly exceed their 2021 highs. On the contrary, investors were wary of the profits made in 2021 and therefore valued the future more towards the dark decade 2010-2019. . I expect 2022, 2023 and 2024 bulk shipping rates to be around 2021 levels, which means earnings and dividends will remain at the higher end of the spectrum. This should gradually lead to a revaluation.
The global economy continues to grow, and with it the need for bulk shipping. In this context, the construction of new bulk carriers is quite modest. This is largely due to bank losses related to bulk shipping in the middle of the last decade. Banks are now much more cautious in financing construction. Potential changes to environmental regulations also discourage ordering ships before these changes are finalized. It usually takes about two years from ordering a ship to delivering it. Shipping companies also understand that if they all try to grow quickly, after two to five years (depending on how far between current demand and current supply), shipping rates will drop to break even again. Also, bulk carriers are usually demolished after 20-30 years, but currently there are very few demolitions, so the fleet as a whole is aging. If shipping rates drop, older ships will be scrapped. Eagle’s fleet is in good condition, with an average age of nine years. Currently, the industry’s net fleet growth (newbuilds minus scrapped vessels) is at its lowest in two decades.
Overall, the demand equation looks good until at least 2024. I would venture to say that as we move forward into 2023, we may be able to shift that outlook to 2025. Although rates will fluctuate, I expect the trend to see just a bit of a slowdown in the first half of each year, followed by insufficient capacity in the second half, could last well beyond 2025.
Conclusion
With a projected return of 11.6% supported by strong net income and shipping rates likely to see their usual seasonal increase in 2H 2022, Eagle Bulk Shipping looks undervalued and rates a strong buy from me. It compares well to Star Bulk Carriers but focuses on a more specific area of the dry bulk market. It is well managed and efficient. Eagle carries similar risks to other bulk shippers, primarily macroeconomic risks. The other main risk is that because the segment is very profitable, one entity will start building too many Supramax ships. However, this situation can be monitored. If this happens, it will be done slowly due to high investment costs and ship construction delays. I see Eagle Bulk Shipping as very likely to remain very profitable at least until 2024. At the current share price and dividends, investors are more than compensated for the potential risks.
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