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...
At long last, the news is in -- and the news is pretty good. Dry bulk shipper Star Bulk Carriers (NASDAQ:SBLK) reported its fiscal Q1 2017 earnings on Wednesday, and like Diana Shipping (NYSE:DSX) last week and Scorpio Bulkers last month, Star Bulk beat on earnings.
Star Bulk lost money for the quarter, and its stock declined as a result. But like its peers Diana and Scorpio, Star Bulk lost less money than analysts had expected it to lose. In response to the earnings beat, and the subsequent decline in stock price, stockbroker Seaport Global Securities is upgrading Star Bulk stock from neutral to buy this morning -- and predicting the shares will nearly double in value over the next year.
Here are three things you should know about that.
1. What Star Bulk said
Athens-based Star Bulk reported $0.26 per share in net losses for its fiscal quarter on Wednesday, but noted that it lost only $0.21 after adjusting for one-time costs. This was better than the $0.22-per-share pro forma loss than analysts had been bracing for. Additionally, Star Bulk reported revenue of $64.9 million that surpassed expectations of $60.3 million by 8%.
So why did the shares decline in response to this news? Profit-taking may be the simplest explanation. After all, prior to earnings being released, Star Bulk shares had already risen 55% since the year began.
2. What Seaport Global said
Selling Star Bulk now, however, after it just exceeded expectations, would be a mistake -- or so says Seaport Global. In a note reported on by StreetInsider.com this morning, Seaport warns that "spot rates may be range-bound as we enter the seasonally weaker summer period." Nonetheless, Seaport believes that "drybulk market fundamentals remain attractive as limited fleet growth coupled with steady demand growth have created a favorable backdrop for the drybulk market."
Ultimately, Seaport expects to see Star Bulk shares nearly double in price, rising to $13 per share over the course of the next year.
3. What else Star Bulk said
Supporting this view, Star Bulk noted in its earnings report that "Daily Time Charter Equivalent Rates" (TCE) have roughly doubled over the past year to $8,176. This is a crucial number for dry bulk shippers.
In an article discussing Star Bulk rival Diana Shipping late last year, The Wall Street Journal noted (requires subscription) that for dry bulk shippers to be able to earn a profit, the breakeven point (on a Kamsarmax-size dry bulk ship at least) is $8,000 per day. Granted, only 20 of Star Bulk's vessels are of Kamsarmax size -- 24 are larger, and 26 smaller -- and the average size across the company's fleet of 70 ships is 106,100 tons, which is a bit larger than Kamsarmax size.
Still, Star Bulk's average ship size is a pretty close fit for that $8,000 rule of thumb. In theory at least, if Star Bulk's TCE rates stick around $8,200 or so, and ideally, rise a bit higher, it should be possible for Star Bulk to start earning profits again soon. In this regard, Star Bulk noted this week that it has "fixed approximately 81% of our available days in the 2nd quarter of 2017 at an average TCE of $10,150/day."
That should be good news for profits in Q2.
The most important thing: What the Baltic Dry Index is saying
Will those rates remain above the breakeven point for Star Bulk? Investors can certainly hope they will, but right now, the trend is no friend to dry bulk shippers. Although Star Bulk looks to have savvily locked in respectable rates for the current quarter, the Baltic Dry Index (which tracks average shipping rates across the industry) is currently trending lower.
After entering the year at a below-average point of 953 (the index's baseline is 1,000 points) and rising to as high as 1,338 at the end of March (presumably, around the time Star Bulk was locking in higher rates for Q2), the BDI has since sunk back to a rather miserable level of just 918 points. This implies lower rates -- and greater losses -- for Star Bulk stock going forward.
Furthermore, putting a torpedo in Seaport's prediction of "limited fleet growth," just earlier this week another shipping company (albeit one in the container business, not dry bulk -- Costamare Inc. (NYSE:CMRE) -- announced it is raising cash and buying ships. If more shippers in the dry bulk industry follow Costamare's example, it could bode ill for predictions of supply constraints on shipping services -- and put a big hole in Seaport Global's buy thesis.
I hate to break the bad news, but the best use of today's upgrade, and resulting surge in Star Bulk stock, may be to exit the stock before things get even worse for this business.