Neil Macneale, is well known for compiling an ongoing model portfolio based on companies that have a...
This Eagle Has Landed
12/17/2007 12:00 am EST
Bryan Perry, editor of The 25% Cash Machine, says dry bulk shipper Eagle Shipping can keep up the smooth sailing even if the US economy weakens.
It’s time to up our exposure in the dry bulk shipping sector.
Demand for raw materials from China, India, and other Pan-Asian developing countries is driving record exports from the United States and other commodity-rich nations. That has resulted in a significant increase in the annual growth rate and demand for dry bulk commodities in the past five years and, therefore, a strong environment for freight rates.
With two-thirds of the world’s goods transported by sea, it should be no surprise that I want us to commit further to the sector following the recent correction that’s driven share prices down to their current, enticing entry points. International shipping’s vital role in global trade is not going to change soon and commodity dry bulk shipping accounts for just under 40% of all seaborne freight.
Eagle Bulk Shipping (NASDAQ: EGLE) is the largest US-based owner of Handymax dry bulk vessels. This modern fleet is comprised principally of Supramax-class vessels (50,000 to 60,000 deadweight tonnage)— the larger, more efficient design enjoying strong customer demand around the world. EGLE believes the cargo-handling flexibility and carrying capacity of the Supramax-class vessels provides a distinct competitive advantage in the dry bulk marketplace.
Eagle [recently] completed a deal for 26 new Supramax vessels at $1.1 billion. With delivery, its fleet will grow from 23 to 49 vessels, and tonnage capacity will grow by 124% to approximately 2.7 million deadweight tons. The average age of the fleet will be reduced to two years, and that means little down time and efficient operations.
Eagle’s strategy is to charter the company’s fleet on medium- and long-term time charters, which allows it to take advantage of the stable cash flow and high utilization rates associated with such charters.
Shipyards that assemble dry bulk carriers are booked solid through 2009, meaning there is a lack of sufficient shipping tonnage. Sustainable demand should translate into strong dry bulk shipping markets in 2008, which is why charter rates have remained firmly higher.
[In the third quarter], net income increased 70%, [while] earnings before interest, taxes, depreciation, and amortization (EBITDA) increased by 24% from the same quarter of 2006.
What amazes me most is that compared to other transportation sectors, and despite the fact that the sector carries the fattest dividend yields, dry bulk stocks trade at a steep discount to other cargo transportation sectors like trucking, railroads, and airlines.
The threat of a US recession at this point could dampen the torrid 10%-plus GDP growth rate for China and India, but even at a reduced rate of 4%—5%, pricing for transporting dry bulk shipments will remain firm for the foreseeable future.
Eagle’s current dividend payout is $2.00 per year, translating into an 8% yield on the stock itself.
Establish a full position in Eagle Shipping, buying it up to $28. (It closed above $26 Friday, 25% off its 52-week high—Editor.)
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