And despite strong growth projections, shares recently traded at just 7x forward earnings. If the global economy remains stable and the industry continues to gain momentum, Star Bulk Carriers offers tremendous upside potential.
Industry Turnaround Gaining Momentum
Star Bulk Carriers is a shipping company that provides global transportation of dry bulk materials, including iron ore, coal and grain and minor bulks which include bauxite, fertilizers and steel products. The company currently owns and operates eleven Capesizes, four Post Panamaxes, six Kamsarmaxes, two Ultramaxes, and ten Supramaxes, and will accept delivery of another 34 secondhand vessels in the second half of 2014. In addition, the company has 13 Newcastlemax vessels, 10 Capesize vessels, and 14 Ultramax vessels on order for delivery by early 2016. It is incorporated in the Marshall Islands and has executive offices in Athens, Greece.
Following years of extremely depressed pricing, the drybulk shipping industry has finally started to improve. And this momentum is expected to pick up steam. Many industry experts expect the dry bulk shipping sector to experience an improving charter rate environment throughout the second half of 2014 and 2015 as demand continues to outpace supply in the space.
Despite a slowdown in China and sluggish global economy, demand for dry bulk shipping has been solid. And this demand is expected to remain strong barring a major slowdown in the global economy. Furthermore, after experiencing annual fleet growth of more than 10% from 2009-2012 (due to orders that were generally placed pre-Great Recession), dry bulk shipping fleet growth finally began to slow in 2013 and is expected to slow even further in 2014 and 2015. So this supply/demand imbalance is expected to drive rates higher. And considering Star Bulk’s significant operating leverage and financial leverage, even moderate top-line growth should lead to stellar earnings growth.
Earnings Estimates Soaring
Star Bulk delivered better-than-expected second quarter results on August 20. Adjusted earnings per share came in at $0.06, well ahead of the Zacks Consensus Estimate of -$0.02. The company also beat on the top-line due to higher-than-expected spot rates.
This, along with the accretive acquisition of 34 vessels, prompted analysts to revise their estimates significantly higher for both 2014 and 2015. This sent the stock to a Zacks Rank #1 (Strong Buy).
You can see the big jump in consensus estimates in the chart below.
The 2014 Zacks Consensus Estimate is now $1.03, up from $0.51 just 30 days ago. The 2015 consensus is currently $2.27, up from $1.29 over the same period. Based on these estimates, analysts project 78% EPS growth this year and 120% growth next year.
The materialization of these growth rates is dependent on charter rates in the dry bulk shipping industry, which is notoriously volatile. But as I discussed earlier, the supply/demand relationship continues to point to higher pricing throughout the remainder of 2014 and into 2015.
The valuation picture looks attractive for Star Bulk. Shares trade just 7x 12-month forward earnings despite the spectacular growth forecasts. This small cap stock has just two analysts covering it (including one that just initiated coverage in early September), so it appears to be flying under-the-radar for now.
Star Bulk also has a solid balance sheet with over $40 million in cash on hand and a net debt to capital ratio around 40%.
While Star Bulk looks undervalued at these levels, it’s important to note that its financial results and stock price are heavily tied to the global economy and volatile industry prices. So expect plenty of volatility in shares of Star Bulk.
The Bottom Line
With improving industry trends, strong earnings momentum and growth projections, and attractive valuation, Star Bulk Carriers offers investors a lot to like.