Dry bulk stocks and the dog days of summer

Investors in listed equities have sensed the dry side’s torpor, and have taken a step, or two, or three, back as cautious sentiments have dominated. Each of the shipping sectors, containers, tankers and dry bulk, to a lesser extent, have all seen “booms” over the past two years generating cash flows which have enabled listed names to reduce their financial leverage, as debt has been paid down, and to reward shareholders with dividends, and with share buybacks.

These types of actions loom large in the thinking of analysts- who are, of course, hoping for resurgent China-based cargo flows, but are focusing equally on the “shareholder- friendly” measures when charting the potential course for traded shares.

Analyst Ben Nolan from Stifel referred to ‘The Dog Days of Summer’ in a report on Genco Bulk Carriers (NYSE - GNK) following its Q2 2023 earnings report. The drybulk sector has treaded water as a hoped-for uptick in Q2 did not materialise; GNK had peaked just shy of $20 per share in late February, 2023- early August saw its shares trading at a little above $14 per share. Stifel’s report puts a target price of $23 on the shares.

In looking at GNK, Nolan stresses: “The lower debt position of the company reduces operating leverage and cash breakeven levels which is helpful in periods of dry bulk weakness such as now.” He does note that: “The company's variable dividend policy does get pretty thin with less revenue.”

Star Bulk (NYSE - SBLK), recently trading around $18 per share, has also back off from its mid-Winter highs (in the mid $20’s).

Another well-respected analyst, Omar Nokta, from Jefferies, has put a target of $22 on SBLK shares, slightly above its NAV/ share, stressing the financial aspects. “Despite dry bulk market softness, return of capital remains paramount”, he wrote, pointing to Star Bulk’s recent cash raising sale of six ships (bringing in $111 million) and a new share buyback authorization. Noting that the present trading price is below NAV, he said: “[we] expect management will continue to utilize its resources to help bridge the valuation gap.”

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Stifel is also watching Eagle Bulk (NYSE - EGLE), which analyst Nolan described as “…flying through a storm.” Financial considerations, rather than expectations of a huge burst in cargo demand, loom large. EGLE also cruised through late-Winter optimism - trading up above $65/share in late- February with buyers eying PE investor Oaktree’s on-again/ off-again exit from EGLE shares - only to back down to the mid- $40’s in early August. Ultimately, the company purchased Oaktree’s shares at $58/share, in early June.

In a just-released report following EGLE’s Q2 earnings release, Stifel noted that: “Following the acquisition of 28% of shares outstanding from Oaktree and a related increase in financial leverage, Eagle has significantly increased the degree of operating leverage.”

In commenting on the purchase of these shares, which aroused the ire of other large shareholders, analyst Nolan opined that: “This did place increase leverage as the company issued $175 million of incremental debt to help fund the purchase, although we believe leverage is still very manageable. Our new Net Asset Value calculation is $67.75 per share.”

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