landbysea/E+ via Getty Images
Eagle Bulk Shipping (NASDAQ:EGLE) owns a fleet of 53 dry bulk ships focused on the Ultramax and Supramax segments. It reported first quarter results on May 6 that were quite impressive. However, the demand for bulk ocean shipping is high, and rates are high for every company in the segment. I own stock in Star Bulk (SBLK) which I started accumulating back when the industry had trouble making a profit, and it has been the only shipping stock in my portfolio. Most stocks I own are pharmaceutical companies, including clinical-stage companies which have no commercial sales yet, and that sector has declined massively this last year or so. This has caused my Star Bulk to exceed my old portfolio rule of no more than 10% in one stock by a massive margin (today it is almost 50% of my portfolio). I am looking at Eagle partly to get more insight into the trajectory of the dry bulk shipping industry, and partly because it might make sense to take some of the massive dividends Star Bulk is generating and put them in Eagle, which also is paying a substantial dividend. In the main part of this article I will report my findings on Eagle and make a few comparisons with Star Bulk. Then I will use those insights to argue there is likely still considerable upside in Eagle Shipping.
Eagle Characteristics
Eagle Bulk Shipping is headquartered in Stamford, Connecticut, USA. Its ships range in size from 50 to 65 thousand metric tons (deadweight) and typically carry goods like coal, grain, iron ore, fertilizer, cement and other minor bulks.
Eagle stock, like that of all bulk shippers, tends to be volatile, but it more or less follows the Baltic Exchange Dry Bulk Index or BDI, or more specifically a subindex, the Baltic Supramax Index or BSI. The stock price made the company look like it was in trouble at the beginning of the pandemic, falling from near $30 at the end of 2019 to under $10 per share at times in May 2020. Then the ship righted itself as demand returned and climbed in 2021 and shipping rates were bid up. Despite volatility, Eagle share prices have been over $60 for a couple of months now and have gone over $70. In addition, Eagle initiated a substantial dividend in 2021, which will be looked at more deeply below.
Eagle specializes in two of the mid-sized major classes of bulk carriers, Ultramax and Supramax. For these categories they have one of the larger of the world’s fleets. Notably Eagle does not own Capesize vessels, which are used mainly for iron ore and coal going directly from Brazil, Australia, and other major sources to, mostly, China. But they do carry smaller loads of coal and iron ore to less intense users. If you look at Slide 7 from the Eagle April presentation, you can see that the focus on the Supramax category contrasts with that of Star Bulk, Golden Ocean and others in their peer group. Because 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 shown on Slide 16 of the presentation just mentioned. Note there is seasonality, as coal is usually more in demand for winter heating and grains get shipped after harvests.
Eagle Q1 2022 Results & Dividend
For the first quarter of 2022 Eagle Bulk Shipping reported revenue of $184 million, up 90% from $97 million year-earlier. Net income was $53 million, over five times the $10 million reported year-earlier. Diluted GAAP EPS (earnings per share) were $3.27, up from $0.84 year earlier. Cash provided by operating activities was $42 million. Cash and equivalents ended at $84 million, down a bit from $86 billion year-earlier. As is typical in the shipping industry, where vessels are financed, there was long-term debt of about $330 million. However, that was against vessels held at a value of $900 million. By GAAP accounting stockholder equity was $694 million.
The dividend program was started in Q4 2021. For the first quarter a $2.00 per share dividend was declared. That dividend was for shareholders of record on May 16, 2022 and is to be paid on May 25, 2022. The dividend used $26.8 million in cash, or about 50% of net income. The announced dividend target is a minimum of 30% of net income, but that appears to be of annual income, with the dividend held near $2 per quarter. Rates and net income tend to be seasonal in the industry, lower in 1H and higher in 2H.
Projecting out to $8.00 per year, at a price of $69.00 (as I write) the yield is 11.6%. Note also that market capitalization is currently near $946 million.
Eagle Bulk v. Star Bulk
As I said above, among the bulk shippers I am most familiar with Star Bulk, and I own its stock. While Star Bulk has some vessels in the Ultramax/Supramax category, its major capacity is in the larger Panamax and Cape categories. It is much more heavily weighted to carrying coal and iron ore, though it does a substantial business in minor bulks. I am going to use Q4 2021 for a few points of comparison. By the time you read this Q1 2022 results for Star Bulk should be out, if you want an updated comparison.
Eagle Bulk had revenue of $185 million, while Star Bulk had revenue of $500 million. GAAP net income was $87 million for Eagle and $300 million for Star. So net income as a percent of revenue was 47% for Eagle and 67% for Star. That might argue that Star Bulk was the more efficient carrier, in Q4 2021 at least. I think they are both efficient carriers, but that Star Bulk’s great size gives it an advantage, especially when shipping rates are as favorable as they were in Q4 2021.
While Star Bulks’ dividend plan is also transparent, it is a bit more complicated, and varies more quarter by quarter. The dividend for Q4 (paid in Q1) was $2 per share, giving a yield of 25% when the stock price is $32 per share. Following seasonal patterns, 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 think the most balanced approach is to use those received in Q2 2021 through Q1 2022 by Star Bulk, which paid out $4.25 per share and yields 13.3% at a price of $32 per share. For Eagle Bulk the regular $2.00 quarterly dividend works out to 11.6%. For dividends, at least at present, Star Bulk is a bit more rewarding. Keep in mind that net income not paid out as dividends can also help stockholders by paying down debt or expanding or maintaining the fleet. The yield also depends on the price the stock is bought at, so dips increase yield. The yields are close enough today that on another day Eagle’s might be higher. Also, there is the risk that bad shipping rates at some point will lead to losses and reduction or even cancellation of dividends.
Long-term outlook
Barring a major global depression, the outlook for bulk shipping, and in particular for Eagle’s cargos and pricing, is quite bright. That does not mean I expect prices to significantly exceed their 2021 highs. Rather, investors were suspicious of profits derived in 2021, and so have valued the future more towards the dismal 2010 to 2019 decade. I expect 2022, 2023, and 2024 bulk shipping rates to be roughly at 2021 levels, which means profits and dividends will remain at the high end of the spectrum. That should gradually bring a revaluation.
The global economy continues to expand, and with it the need for bulk shipping. Against that background the building of new bulk ships is quite modest. This came about largely because of banking losses related to bulk shipping in the middle of last decade. Banks are now much more careful about financing building. Potential changes in environmental regulations also discourages ordering ships before those changes are finalized. It typically takes about two years from when a ship is ordered until when it is delivered. Shipping companies also understand that if they all try to expand rapidly, after two to five years (depending on how far current demand is ahead of current supply) shipping rates will decrease towards break-even again. In addition, bulk ships are typically scrapped after 20 to 30 years, but right now very little scrapping is going on, so the fleet as a whole is aging. If shipping rates come down, older ships will be scrapped. Eagle’s fleet is in good shape, with an average age of nine years. Currently the industry’s net fleet growth (new builds minus scrapped shipping) is at a two-decade low.
All in all, the demand equation looks good through at least 2024. I would venture that as we move into 2023, we will be able to move that outlook into 2025. While rates will fluctuate, I expect the pattern of seeing just a bit of slack in the first half of each year, followed by insufficient capacity in the second half, could last well past 2025.
Conclusion
With a projected yield of 11.6% supported by solid net income and shipping rates likely to see their usual seasonal rise in 2H 2022, Eagle Bulk Shipping appears undervalued and rates a Strong Buy from me. It compares well with Star Bulk Carriers but focusses on a more specific domain within the dry bulk market. It is well managed and efficient. Eagle carries risks similar to other bulk shippers, mainly macroeconomic risk. The other main risk is that because the segment is highly profitable some entity will start building too many Supramax ships. However, that situation can be watched. If it happens, it will happen slowly due to the high capital costs and time frame for building ships. I see Eagle Bulk Shipping as highly likely to remain highly profitable at least through 2024. At the current stock price and dividend investors are more than compensated for the potential risks.
