Time to Buy Eagle Bulk Shipping? (EGLE)

Eagle Bulk Shipping EGLE is a dry bulk shipping company that operates in the Supramax class of vessels. The company almost did not make it through the Great Recession as shipping rates plummeted and their debt burden crushed shares. However, with bulk shipping rates stabilized and the company adding to their fleet, should traders pick up the stock? Let's look at that debt load because that is THE key point when looking at this stock (and all water transport names). The company issued new stock and debt in 2009; they used this to add to their fleet and shore up their capital ratios. Be that as it may, the debt levels are extraordinarily high, long-term debt representing 56.25% of total assets. Currently, interest expense represents 49.9% of the company’s total operating income; while this is up from 23.4% in 2009, it is lower than when the company went public in 2005, when that same metric was 54.6% (note that the stock was trading at $12.00 to $13.00 at that time versus its current trade price of $4.67). So, the debt load looks manageable in respect to historical metrics and it is also on par with industry trends. It seems that if the company can continue to grow revenue, which they have been doing steadily for the past five years, the stock is undervalued. There are two ways to grow revenues in the dry bulk shipping space: more ships and greater day rates. In regards to ships, the company just announced that they took delivery of the Ibis Bulker, another Supramax ship, which they are already putting to work. It has a three-year charter at a base rate of $17,650. This means that even if day rates push lower, the company will have a defined revenue stream from this ship. EGLE also has 13 more ships to be delivery in 2010-2011, 12 of which already have agreed upon time charters with floors around $17,650. The company’s current 33 ships are also on time charter, with no day rate minimum below $8,500; several have floors as high as $25,000 to $39,500. If you extrapolate out the company’s Q1 expense numbers per ship, per day you will see that vessel expenses total only $425. If you dropped base rates to $8,500 across all ships, that’s an $8,075 profit on every ship, per day; this equals $100.2 million in operating profits per year. Take out SG&A and Depreciation and you have roughly $30 million in operating income, which equals interest expense. This type of structure allows the company to have a very high utilization rate, stable cash flow, and some upside to shipping rates. And, as we saw above, the company can literally not go bankrupt under current contracts. As for the day-rate side of the equation (the second of two ways to increase revenue), we see that they have a rate floor and also have upside profit potential built into the day rate contracts (usually 50% over $20,000). Looking at the Baltic Dry Index, which is right around $20,000 right now, EGLE is actually making more than their base contracts stipulate. The company’s revenues are increasing, rates are adding to profits, downside risk is capped, and the company is trading at a 60% discount to its relative price five years ago—this story seems ripe for the picking. On a more technical basis, short interest is extremely high (18.84%), which could help shares to rise if shipping rates base out and/or move higher from this level. In addition to that, the stock has just poked its head above the 18-day moving average and is holding there, which is a signal that selling pressure is abating and that traders are comfortable with current levels. This could be the start of a new bull trend in the name. To put a cherry on top, J.P. Morgan just raised the company to Overweight from Equalweight on June 7th, when the stock was trading $4.44 to $4.55. Traders should continue buying half a position here and selling the $5 straddle in December for $1.30 as a way to get long in a hedged manner, with 34% upside potential (yearly return of 77.8%). If shares move lower, your cost basis of $4.20 will have you in shares at a 10.6% discount to the current trade price.