Why Star Bulk Carriers' Stock Sunk Yesterday

Star Bulk Carriers’ strategy shift has some investors on edge.

Nickey Friedman
Nickey Friedman
Apr 15, 2014 at 9:07AM

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 (NASDAQ:SBLK) slipped under the waves by 4.1% on April 14 following continued daily weakness in the Baltic Dry Index, or BDI.

So what: The BDI is an index based on various ship sizes and routes from around the world, based on the average market daily spot rates. The index fell another 1.3% yesterday after falling nearly every day for weeks. Within the index, the largest and most profitable type of ship, the Capesize, continued to offer significantly higher performance on a year-over-year basis, but fell 2.5% for the day. Rates for Panamax ships are now a decent clip below the year-ago levels.

The main reason for the weak rates is fear. There have been a number of reports about the slowing growth of China's economy and the growing number of defaults with Chinese banks. Considering that 70% of global iron ore shipments are sent to China, any weakness in demand could hurt Capesize rates. There were also reports of soybean order cancellations, which are delivered by Panamax ships.

Now what: The concern for Star Bulk Carriers is that the company is veering toward a strategy based on the BDI and away from long-term, fixed-rate contracts. Star Bulk Carriers currently has 50% of its operating days open for 2014, and most of 2015 is available as well. As such, swings in rates can make or break its fortunes.

In a recent interview, CEO Spyros Capralos said, "Given our bullish view on the freight market, these strategies are primarily spot oriented." There are naturally going to be some fears that Star Bulk Carriers got this strategy all wrong.

Analysts currently expect Star Bulk Carriers to earn $0.62 per share this year and $1.24 per share next year, compared to the $0.13 per share earned in 2013. Contributing to these expectations of improvement in EPS is the company's plan to deliver 11 new ships starting in 2015, but it is mostly due to the hope that rates will rise. If higher rates don't materialize as Star Bulk Carriers expects, look for analysts to lower their estimates.