Why has the stock of shipping company Excel Maritime Carriers (AMEX:EXM) had a 52-week trading range of $3.61 to $65.85 a share? Exploding demand for bulk shipments of natural resources such as coal, iron ore, and grain into China caused dry bulk shipping rates, and Excel's earnings, to soar.
For the first nine months of this year, Excel reported that revenue increased by 86% and income by 278%. Cash grew to $27.4 million from $4.3 million. But, unlike companies such as Taser (NASDAQ:TASR), which trade at inflated price-to-earnings ratios because of their growth prospects, Excel trades at 13 times earnings.
When I last wrote about Excel, I concluded with, "Know this: Based on historical operating margins, this company is overvalued. Even with the cash piling up, it is hard to justify today's price."
The company's announcement Thursday that it had sold shares to raise cash wasn't surprising. With Excel's market capitalization of $337 million (and sales of only $41 million) and a price-to-book value of nine times, the market was giving an extremely high valuation to the stock. It made business sense to sell shares.
What is shocking, even to the casual observer, is that the company sold its stock at $25 a share -- a steep 29% discount to the $35 a share closing price Wednesday on Wall Street.
The critics of this company's valuation point to Tsakos Energy Navigation (NYSE:TNP) -- a company covered in May. Although involved in shipping oil (another commodity for which Chinese demand has sent rates through the roof), it sells for 6.6 times earnings and 1.6 times book value. As with giant competitor Teekay Shipping (NYSE:TK), which sells at a similar valuation, the market is concerned about the long-term shipping rates and is not willing to overpay for current earnings.
Critics also question Excel's recent purchase of two 20-year-old ships. With shipping rates so high, even second-hand tonnage does not come cheap. And the company, built with secondhand ships, will certainly not garner premier shippers (and premier rates) when shipping capacity comes back in balance with demand -- which it certainly will.
Many will focus on the price-to-earnings ratio that is lower than the market average. The smart investor will see that this company sells for an inflated price -- relative to other shipping companies with much younger fleets -- and question why the shares are selling for $30 apiece (although down from $35 on Wednesday) when the company is willing to let them go for $25.
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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.
