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Benefit from China's Expansion with Shares of this
Shipping Firm |
Published:
September 25,
2007
Eagle Bulk Shipping (Nasdaq: EGLE, $25.94) -- This dry bulk
shipper uses a fleet of dozens of vessels to transport coal,
grain, iron ore, and other essential products to ports around
the world.
Rather than operate in the volatile "spot" market (the current
daily market for ship rentals), Eagle books its ships on
long-term fixed-rate charters -- protecting against price
fluctuations and locking in high rates. Because guaranteed
charter revenues are all but in the bank, Eagle has one of the
most predictable near-term cash flow streams around. Management
also has a goal
of returning nearly all surplus cash flow to shareholders
through generous dividend distributions.
Booming economic expansion in China has fueled a surge in demand
for raw materials like iron ore (used to make steel) and coal
(used to generate power). Meanwhile, worldwide shipping capacity
has remained fairly tight, pushing shipping rates into record-high
territory. These higher shipping rates will prove to be great news for Eagle
shareholders, leading to higher revenues as the firm signs new
long-term charters and as its existing charters come up for
renewal.
From a big-picture perspective, construction and infrastructure
projects in fast-growing emerging markets will spell rising
demand for products like iron ore and cement -- and ocean-going
ships are often the only means of transport. Right now, demand for shipping far
outweighs the available supply. As a result, the Baltic Dry
Index (which measures shipping rates) has soared to one record
high after another in recent weeks.
Of course, new ships are being built, but analysts generally
agree that capacity won't begin to catch up with demand until
around 2010. In fact, some analysts are even forecasting that dry bulk shipping
could be entering a secular bull market that could last for 25 years,
punctuated only by the occasional cyclical slowdown.
As for Eagle, the company recently completed a massive
acquisition of 26 "Supramax" vessels from a Greek shipping firm
for $1.1 billion. This deal will more than double the company's
fleet from 23 to 49 vessels and will boost its tonnage by +124% to
2.7 million deadweight tons (DWT). The purchase will also reduce
the average ship age in the fleet to just two years. So while most
rivals will have to gradually replace aging vessels, Eagle
should be set for years to come.
Most importantly, nearly all of the acquired ships are already
booked under long-term multi-year charters that will bring in
minimum revenues of about $1 billion -- and potentially much
more, thanks to profit-sharing agreements. Better still, as old
contracts expire, the company also has the opportunity to renew
them at higher rates. For example, the smallest ship in the
firm's fleet, which was earning about $24,500 per day, just signed a
new two-year charter at $34,500 per day -- an increase of +40%.
If owning 23 vessels in this market is good, then owning 49 is
even better. Before the acquisition, the company stood to
receive about $275 million in minimum contracted revenue -- that
total now stands at $1.2 billion. As a result, management should have
little trouble meeting the firm's annual dividend distributions
of $1.88 per share (for a 7.2% yield), and future dividend hikes
appear likely.
With a much stronger cash flow stream, the firm's
fair value has increased dramatically, and we recently revised
our target price for EGLE to $32 per share.
There is always the risk that a global economic downturn could
put downward pressure on shipping rates and batter the shares of
many dry bulk shippers, which tend to be highly volatile.
However, we think the rewards outweigh the risks at this point,
and shareholders should look forward to steady contract-based
revenues and robust dividend distributions from EGLE.Good investing!
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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