Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
The week is still young, but already, it's been a bad week for investors in the commercial dry bulk shipping sector. On Monday, Genco Shipping & Trading Limited (GNK 3.93%), one of the biggest publicly traded dry shippers in the world ($135 million in annual revenue), reported fiscal Q1 2017 earnings that broadly disappointed investors.
Genco's $0.66 "adjusted" per-share loss missed analyst targets by $0.02 per share. Combined with a weak revenue performance ($38.2 million when, according to StreetInsider.com, analysts had expected more than $38.85 million), this was enough to send Genco shares down as much as 6% in trading yesterday. It also probably doesn't bode well for other participants in the dry bulk shipping market, such as Star Bulk Carriers, Diana Shipping, Eagle Bulk Shipping, and Scorpio Bulkers -- all of which had down months in April.
And yet, hope springs eternal on Wall Street. Here are three things you need to know about that.
1. Wall Streets's got hi-i-igh hopes...
In March, if you recall, Wall Street banker Morgan Stanley was first to sound the all-clear on dry bulk shipping stocks. With the Baltic Dry Index soaring past 1,300 and looking likely to head higher, Morgan Stanley declared that the BDI had "passed through its cyclical lows" and was ready to enter a new era of high prices. Older, fuel-inefficient cargo vessels were getting scrapped and taken out of circulation, argued Morgan. Construction of new ships to replace them was down, and growing at only 1% annually. Overcapacity was a thing of the past -- and profits would be the story of the future.
Except that's not what happened. Since Morgan Stanley declared the boom days for dry shipping were upon us, the BDI has dropped 25%, indicating a 25% reduction in the average rates that cargo shippers could charge for their services. The BDI hit bottom at 994 points on May 5, and has rebounded somewhat since, but Morgan's "cyclical lows" argument is in tatters.
2. Hope springs eternal
It's lucky for the dry shippers, then, that they've got other friends on Wall Street. Just this morning, for example, two more bankers -- Jefferies & Co. and Seaport Global Securities -- responded to Genco's gloomy earnings report with glowing recommendations of their own.
Jefferies, which was already bullish on the stock, argued that "with spot charter rates and asset values firming and likely to continue to firm ...GNK shares have further upside." The value of Genco's assets alone, says Jefferies, are worth more than the company's entire market capitalization today. Indeed, Jefferies calls Genco stock's current valuation of just 60% of net asset value "ridiculously" low. Rather than going down, Jefferies believes Genco stock should double -- to a new price target of $22 a share.
Seaport Global agrees. Far from discouraged by Genco's report, it's upgrading the shares to buy (with a $16 price target) and predicting Genco will begin buying out weaker rivals as charter rates for dry bulk shippers resume moving higher.
3. What Genco says -- and what the BDI says, too
Interestingly, Genco itself made no mention of plans to buy out other dry bulk shipping companies in its earnings statement earlier this week -- in fact, Genco gave no guidance, whatsoever, for what investors should expect as the year goes on. (Although management did confirm Jefferies' theory that spot charter rates for dry bulk shippers are "higher" this year than last, confided that it sees "heightened Chinese demand for iron ore cargoes," and cited the same 1,338 BDI price that attracted Morgan Stanley's attention two months ago as evidence that things may be looking up).
Which brings us back to the BDI itself. What can we see here that might support, or deflate, analysts' enthusiasm for Genco stock? Honestly, not much. While the BDI did hit that oft-mentioned high at the end of March, it hasn't come close to repeating that high since mid-April. And as I've already noted, the BDI currently reads 25% below its late-March high. Whether it will get back there any time soon is, really, anybody's guess.
What it means to investors
Meanwhile, investors in Genco stock are stuck holding a stock with negative profits for the past 12 months, a stock unlikely to earn any profit at all this year, and a stock valued at 35 times what even optimistic analysts see as its likely profits for next year.
On top of all that, Genco is continuing to burn cash (negative free cash flow of more than $50 million last year) and to pile up debt ($507 million at last report -- three times Genco's debt of four years ago, according to S&P Global Market Intelligence data).
Call me a pessimist if you will, but I just can't bring myself to agree with Wall Street's best and brightest this morning. With so much debt on its books, hypothesizing that Genco might go on an acquisition spree (as Seaport says) seems like a pipe dream to me. And unless Genco can find a way to earn a profit in this still-down shipping market, I can't agree with Jefferies' idea that Genco stock will double, either.