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When a ship's hull springs a leak, the problem needs immediate, decisive attention.The category-5 storm that shattered the noteworthy strength of the dry bulk shipping sector last year seems to be losing strength, tempting investors to leap aboard on the expectation of improving market conditions. However, Fools need to remember to conduct thorough hull inspections before weighing anchor. Recent earnings results provide the perfect drydock.
Eagle Bulk Shipping (Nasdaq: EGLE ) and Excel Maritime Carriers (NYSE: EXM ) both reported profitable quarters, and both continue to keep the creditors at bay, despite their perpetual cargoes of oversized debt.
Eagle delivered earnings of $13.3 million, despite a 67% increase in operating expenses associated with a 25% fleet expansion. Eagle's 99.7% fleet utilization rate is on the brink of perfection, suggesting that demand for bulk carriers may never have eroded to the same gut-wrenching degree that we saw with North American railroad operators such as Norfolk Southern (NYSE: NSC ) and CSX (NYSE: CSX ) .
The seaborne shippers lost valuable pricing power -- as evidenced by the 34% decline in average charter rates reported by Excel Maritime Carriers -- but the ships kept moving.
Excel Maritime Carriers offloaded earnings of $78 million, a 66% decline (on a per-share basis) from the prior-year period, but chipping away the paint to inspect the company's bottom line reveals the first red flag of our drydock inspection. Excel again used a non-cash amortization of unfavorable acquired time charters to bolster revenue ... this time by $75 million, for a year-to-date total of $204 million. Furthermore, Excel indicates that it will cushion future revenue with an additional $289 million of this accounting hocus-pocus over the coming year. The company seeks your help to pay down debt through an offering of 5 million new shares. After spotting this structural crack in the revenue-reporting hull, will you oblige?
Eagle gave this Fool pause by mentioning a newly created company called Delphin -- with CEO Sophocles Zoullas as non-executive chairman -- that will work closely with Eagle in purchasing and managing vessels. Fools familiar with the DryShips (Nasdaq: DRYS ) story and the curious dealings of Curious George may also be raising an eyebrow. Also troubling for Eagle, a huge short interest represents 20% of its float.
Of the two indebted operators, however, Eagle is the clear frontrunner, boasting substantial charter coverage for both existing vessels and the ships on order. Fiscally conservative Fools may prefer Diana Shipping (NYSE: DSX ) or Navios Maritime Holdings (NYSE: NM ) , but this maritime Eagle may yet take flight.
- DryShips is the admiral of dilutive offerings.
- Navios offers aggressive growth without all the debt.
- Still the queen of the dry bulk seas.