Bring Your Shipping Stocks Into Drydock

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.

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The "Dry Bulk Shipping" tag within Motley Fool CAPS lists 17 companies. Join our online community today and share your views on the offerings in this sector. CAPS is free and fun!

Fool contributor Christopher Barker captains yachts somewhat smaller than dry bulk carriers. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Diana Shipping. The Motley Fool has a seaworthy disclosure policy.


Read/Post Comments (5) | Recommend This Article (13)

Comments from our Foolish Readers

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  • Report this Comment On August 06, 2009, at 4:31 PM, Teacherman1 wrote:

    My current long positions in this sector are NM and SBLK but I would consider EGLE and EXM if their price dropped another 20 to 25% (in addition to today's drops), because as you mentioned, they have DEBT problems. They have been running about 40 to 50% too high for my taste, but for a longer term investment, they would be ok in the $4 (EGLE) and $5-$6 (EXM) range. DRYS is for those times you get really bored and want to set off fireworks while holding them in your hands. I recently took a position in the tanker area (TNK), but prefer dry bulk. A good and timely article for anyone considering investing in this area. Be wary of the day when the banks are no longer willing to waive loan covenants. JMO and worth exactly what I am charging for it.

  • Report this Comment On August 06, 2009, at 4:42 PM, ChannelDunlap wrote:

    Teacher your description of DRYS is spot on, nicely done. I bought EXM on the dip today. I like 'em, what can I say. I still have money on the sidelines to throw at it if it dips more, but I've been burned a number of times waiting for them to bottom out only to miss a big jump.

  • Report this Comment On August 06, 2009, at 6:15 PM, ADDICTED2DRYSHIP wrote:

    A Phule named Audio warned people 3 earning reports ago of Excel's "imaginative" earnings... no one save Olle & me seemed to take note. Before this report, people seemed to just glance at their headlines and drive the price higher. Figures that NOW when I'm all in on my positions they'd decide to read and see through the BS, and take the entire sector down with them.

    I'm heavy Eagle, Navios & Star Bulk - very light on the firecracker in the hand, but it has a relatively long fuse and I've got time. Even one of the best in breed - Genco - my largest and only long term investment, wasn't spared from the slaughterhouse.

    Still don't know what to make of Delphin, FRO/SFL had a similar set up and seemed to act in the best interest of the stockholder vs. Economou who just seems to pocket millions brokering deals for DRYS and only acts in the best interest of George. Though I will say trading Georgie's one trick pony is rarely boring.

    BDI has dropped about 1000 points from it's highest point in 2009, current FFA's horrid - and yet commods such as grains, coffee, fertilizer, coal, metals off to the races. Though many fail to correlate shipping rates to the price or what's being shipped - I do.

    And now that financials are well off the bottom and letters of credit more easily obtained for those wanting to ship - I'm of the opinion it's just a matter of time before BDI sets new year highs. At least I hope so - for everyone's sake - if the Baltic Dry Index truly is the early indicator of a rebounding economy as so many claim.

  • Report this Comment On August 07, 2009, at 2:51 PM, Teacherman1 wrote:

    Hey Addicted, if you get so bored that even DRYS is not exciting enough for you, try OCNF. This is a real speculative play (almost a "slot machine stock), but there is a connection with "George". The guy who started this up a couple of years ago learned about the shipping business dealing with him. The price is too low to even "pick" it right now, but if you have a little extra cash and want to see the dials spin around when you pull the lever, a few bucks in this could provide real excitement. You can pick it up for next to nothing. Who knows, maybe you will get lucky and ring the alarm bells in the casino. I own a little, at a very low price. The downside (even though it could be 100%) is pretty minimal, and the upside could be a 15 bagger if they manage to make it work. JMO and worth exactly what I am charging for it.

  • Report this Comment On August 07, 2009, at 3:07 PM, IIcx wrote:

    Great article Christopher and thanks for posting the alert.

    I do like the prospects for CPLP, PRGN, and "Fools" SFL pick in the long term but the shipping sector is pretty ugly at the moment.

    Also see: http://shipping.capitallink.com/ for information and updates.

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