Raw materials are the carbohydrates of our economy. Every country is dependent on commodities like coal, iron, steel, and agricultural products like wheat, corn, and soybeans.
These materials are not just for expansion and growth… but vital for economic survival.
Consider these stats…
China is using about 131 million tons of coal a year. World demand for steel is 1.24 billion metric tons. Iron ore production is around 2,240 million metric tons. And the U.S. production of wheat is estimated to be 2,106 million bushels.
What’s common amongst these numbers?
No single country has a monopoly on any of these commodities. Everyone imports or exports commodities… to some extent.
And this provides a wonderful investment opportunity. Remember, when you trade commodities from a world away, they need to be shipped. And more specifically they need to be shipped in dry bulk vessels.
It’s been a tumultuous year for the global shipping industry. But where there’s adversity and misgivings, there’s also undervalued stocks. And now’s the time to buy to capture the biggest gains.
So let me introduce Eagle Bulk Shipping (EGLE).
EAGLE’S BUSINESS
Eagle Bulk Shipping (EGLE) has a huge fleet of dry bulk vessels. Now dry bulk ships have three main sizes… The Supramax is the largest of the group. The mid-sized are simply known as Handymax. And the smaller versions are called Handys.
Eagle’s fleet is comprised mostly of the Supramax vessels. Management says the flexibility and capacity of these massive ships gives it an operational advantage against competitors.
Now, these aren’t old rickety ships. These are top of the line bulk transport vehicles. And of Eagle’s 40 vessels, the average age is only 4.8 years.
So what is Eagle carrying in their ships?
About 21% of their cargo is agriculture, 19% is coal, 16% iron, and 15% fertilizer. The rest is a mix of construction materials and food stuffs.
The Eagle business model is simple… they own the fleet and rent shipping time to people who need it. Depending on the ship and the route, they can charge between $17,000 and $21,000 a day.
Mother Nature was really sticking it to Eagle Bulk over the past year or so.
Remember the flooding in Australia? Management estimates the flooding slowed coal production by about 30 million tons. Less coal produced means less coal to ship. As a result performance suffered.
The subsequent earthquake in New Zealand didn’t help either. It created a series of supply disruptions.
Then there was the earthquake and tsunami in Japan. As you can imagine, it damaged ports and infrastructure used by the shipping industry.
All of these natural disasters had a very negative impact on the shipping industry.
WHY EGLE? WHY NOW?
Here’s the thing… Mother Nature can impact shipping for a quarter, or two, or three… but at the end of the day, goods still have to be shipped!
I look at these events as one-time short term “black swans.”
When the issues are put behind them, and the economy needs to recover, shippers will once again start making money hand over fist.
The recent dip in stock price and company performance is temporary. We want to scoop up these shares while they’re cheap.
We’re already seeing the rebound start to take hold.
Coal prices rose following the flooding in Australia. The impact was especially important for China. Instead of buying more coal, they used up inventory. Now China’s Coal inventories are off by 30%.
Eventually, China needs to refill their stockpiles… which is great news for shipping companies like Eagle.
The Japanese rebuilding effort should be good for dry bulk shipping as well.
Overall, seaborne trade is expected to jump in the next few years. As a matter of fact, Eagle management expects it to double by 2025. If that’s not a call for growth, I don’t know what is.
Let’s take a closer look at the company numbers…
EAGLE BULK SHIPPING FINANCIALS
It’s not my job to tell you everything’s peachy over at EGLE. Let’s be honest, it’s been a rough year for global economies. Stagnant economic growth coupled with Mother Nature really hurt this company.
And a key customer going bankrupt didn’t help either.
Despite all the doom and gloom, Eagle is still growing revenue. In the first quarter of 2011 they posted revenues over $86 million. The year over year revenue growth for Q1 was nearly 60%!
Even with all of the adversity, Eagle still managed to generate a positive net income… except one of their key customers rocked the boat.
On January 25, Korea Line Corporation filed for protective receivership. It’s like the South Korean form of bankruptcy.
The bankruptcy cost the company nearly $6.5 million as a bad debt expense. And it pushed them back into the red in Q1.
But management didn’t just stand by. Within weeks of the default, Eagle had re-chartered the affected ships to other third parties. Management believes the quick response helped to mitigate losses.
This is by no means the end of Eagle and Korean Lines’ business relationship. In Eagle’s Q1 conference call, management described their customer as significantly stronger post-reorganization.
As a settlement agreement, Eagle managed to hold onto their position as a primary shipper. They also worked out a series of timely payments for the debts owed.
Now, prior to the reorganization Eagle was charging $18,400 a day for the 12 vessels chartered to Korea Line.
According to the new restructured agreement, Korea Line will charter 10 vessels at a guaranteed rate of $17,000 a day. Eagle will also receive all additional profits between $17,000 and $21,000. And 50% of all profits above $21,000, if applicable.
That’s the deal until the end of 2015.
While the earnings numbers aren’t so hot, management is working to change that. Thankfully they have a strong balance sheet with over $97 million in cash. In addition, the company has strong cash flows, generating more than $13 million in operating cash flows in just the first quarter.
Although revenue increased by 18.25% in 2011, EGLE’s operating expense also increased by over 48%. This cut operating income by approximately 58% at the end of 2011.