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Why Star Bulk Carriers Stock Took to the High Seas Last Week

By Nickey Friedman – Mar 11, 2014 at 7:45AM

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Star Bulk Carriers reached new 52-week highs after several catalysts were hit.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Star Bulk Carriers (SBLK -1.71%) set sail last week, rising as much as 23.5% following release of its fiscal-fourth-quarter earnings, its conference call, and the renewed overall strength in the dry shipping market.

So what: For the quarter, Star Bulk Carriers reported adjusted net income of $2.1 million, significantly higher than the $0.3 million it earned in the year-ago period. Adjusted earnings per share came in at $0.07, $0.03 above the $0.04 estimate.

CEO Spyros Capralos called 2013 a year of "radical transformation" for Star Bulk Carriers. Capralos points out that the company ordered 11 new ships during the year just before market prices for new ships jumped by 15% or more. In addition, Star Bulk Carriers scored four used ships at prices below today's market values. It was a good move.

Meanwhile, the Baltic Dry Index, which measures overall global shipping rates, took off like a rocket to rise 22.7% last week. This was the biggest one-week rise of the year so far.

Within the index, the Capesize ships, which are the largest and often most profitable ships, saw rates explode the most; they rose 43% for the week. This bodes especially well for Star Bulk Carriers' five Capesize vessels as well the company's strategy to order and acquire larger ships.

Now what: Star Bulk Carriers was profitable for the full year after losses in 2011 and 2012. Capralos stated, "We believe that our company is now well positioned to take advantage of the improving dry bulk market, as we have repositioned our fleet toward the larger vessel sizes." If so, the company should see much greater earnings in 2014 and beyond.

Capralos added, "We remain optimistic regarding the fundamental dynamics of the dry bulk industry, as we expect the interplay of contained vessel supply and resilient dry bulk commodity demand growth, to enhance the earnings power of our larger, diverse and competitive asset base."

During the conference call, Capralos referred to 2013 as "essentially the bottom of the shipping cycle." He said that Star Bulk Carriers adopted a "flexible commercial strategy so as to maintain long-term spot market exposure taking full advantage of a market recovery." He believes a "broad market recovery" is currently under way.

Capralos dropped a hint about future dividends or buybacks coming. He stated, "As our fleet expands and the drybulk market recovery is established, we will evaluate favorably the potential return of capital to our shareholders in a manner consistent with our overall business strategy, cash flows and liquidity position." The market of course would be pleased to get cash back, but perhaps more importantly it shows confidence in the future.

Like many other dry shippers, Star Bulk Carriers expects continued demand for iron ore in China to likewise increase demand for shipping and thus raise rates. CFO Simos Spyrou points out that there is a flood of new cheap iron ore coming on line from foreign countries. He believes this will lead to the depression of iron ore prices to levels that small Chinese producers can't compete with. The result will be even more importing of iron ore into China and therefore higher shipping rates, according to Star Bulk Carriers.

Fools that are interested in dry bulk shipping stocks should take a look at Star Bulk Carriers. Analysts expect it to earn $1.23 per share in 2015, or double the returns expected for 2014. With a 2015 P/E of a little over 12, and with those analyst estimates continuing to rise, Star Bulk Carriers represents a compelling combination of growth and value.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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