Dry Bulk Rates Are Far Outpacing Earnings And Shares

In ocean shipping, there's an inherent lag between when charter rates recover and when they're reflected in earnings. Such lags are not unusual. If you watch the news and see the price of crude oil suddenly collapse, then expect to immediately fill your tank for much less at your local gas station, you will be disappointed.

The downside of this phenomenon, as shown in the latest earnings of Safe Bulkers SB, is that a sharp rebound in dry bulk rates beginning at the tail end of the second quarter is not showing up in earnings reports until the third quarter. Many bulk ships were booked on charters or on spot voyages in the second quarter during the early weeks of that period, or in the first quarter, when prevailing rates were extremely weak.

The upside of this lag phenomenon is that you can virtually guarantee earnings in the upcoming quarter will be much higher, because rates have surged.

If the stock market is working the way it's supposed to, share prices should reflect current rates ahead of future earnings reports as investors preemptively bid up prices. But the stock market doesn't necessarily work that way – due to broader market issues like trade tensions and recession fears – and it hasn't worked that way for dry bulk stocks, which are largely down year-on-year despite much improved rates.

Safe Bulkers is a perfect example. It is clearly employing its ships at much higher rates today than it did in the prior quarter. The dry bulk market is doing better than it has in years. And yet, in midday trading on Sept. 4, its stock price was down 16% from highs seen in July and down 36% from its 52-week high posted in October 2018.

Second-quarter results

Safe Bulkers reported net income of $1.8 million for the second quarter of 2019, down 56% from $4.1 million in the second quarter of 2018. The adjusted loss for common shareholders in the most recent period was $1.4 million or $0.01 per share, disappointing analysts who had expected adjusted net income of $0.02 per share.

Safe Bulkers owns 42 bulkers totaling 3.8 million deadweight tons (DWT), mostly in midsized classes such as Panamaxes (65,000-90,000 DWT) and post-Panamaxes (90,000-100,000 DWT), with only four in the larger Capesize (100,000 dwt or higher) class. Capesizes have performed the best during the recent rate run-up, although gains are being seen in the midsized categories as well.

Safe Bulkers earned an average of $11,970 per day in charter revenues from its fleet during the most recent period, down 9% year on year.

Lag effect

During the conference call with analysts on Sept. 4, Safe Bulkers chairman Polys Hajioannou explained the lag effect on earnings. "Second-quarter results were affected by a terrible first-quarter spot market of $5,000-$6,000 per day. All of those numbers filtered into the second quarter. 

"You cannot leave your whole fleet in the spot market at those levels," he said. "You have to fix some of them on time charters at $8,000-$10,000 per day and we expect those ships to be rechartered at much healthier rates."

Star Bulk president Loukas Bomparis confirmed, "We are now entering into charters at much higher rates. Despite the concerns of the trade war, both Capesizes and Panamaxes are performing at their highest levels in six years. Capesizes are now trading at around $38,000 per day, compared to $20,000 per day at this time in 2018, and Panamaxes are at about $18,000 per day, compared to $12,000 in 2018."

That said, there is no inherent guarantee that stock prices will behave as they theoretically should and reflect the higher rates. Hajioannou acknowledged that it has been "quiet in the public market" even though "rates have been very hot." He said that if the share price "does not reflect" earnings, "our best option [with excess cash flow] would be to buy back our own stock."

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