Star Bulk Carriers : Star Stock?
Star Bulk Carriers Corp. (NASDAQ: SBLK) is a Greek-based international shipping company that owns and operates a fleet of 125 dry bulk carrier vessels. These vessels range in weight from 52,000 to 210,000 deadweight tons (115 million to 460 million pounds) and transport bulks such as iron ore, minerals, grain, steel, and fertilizer.
Each year, Star Bulk Carriers transports over 60 million pounds of dry bulk cargo around the globe in an environmentally friendly manner. Although we expect dry bulk shipping to be a great year, due to unstable profitability and the significant run-up in the share price, we actually believe that Star Bulk Carriers is not a buy.
Star Bulk Carriers went public through an initial public offering (IPO) in December of 2007. From the chart below, the stock price has essentially been on a sharp downturn since its start. In 2008, Greece experienced a debt crisis that resulted in a 90% decline in Star Bulk’s stock price during that year.
The effects of the debt crisis still linger today, although Star Bulk’s share price has rebounded from its all-time lows of $1.10 in early 2016. The share price is trading at $16.50 as of Tuesday, April 20th’s close, up 86% year to date and up 222% since the May 2020 lows. This recent rally occurred as a result of an unusually strong dry bulk market in 2021 so far. Investors will need to consider whether this strong dry bulk market will continue as that is the major driver for further upside in dry bulk shipping stocks such as Star Bulk.
Star-Bulk Carriers Corp. (NASDAQ: SBLK) All-Time Chart
SBLK Chart 2015 – Present
Source: Yahoo Finance
During a Capital Link forum earlier this year, Aristedes Pittas, the CEO of Eurodry, another dry-bulk shipping company, thinks that this decade will be great for dry bulk shipping. He believes that because January had unusual dry bulk rates, there will be a lot of demand since it’s not following the usual trend. Typically, the dry bulk market is very slow during the first couple of months. He cited that the period between 2000 and 2010 was an amazing decade for the industry, while the period between 2010 and 2020 was terrible. Pittas believes that most dry bulk companies will be profitable if they can hover someone in the middle of these two extremes.
Now let’s discuss Star Bulk’s revenues and profits. We also include a breakdown of voyage and vessel operating costs. Compared to eleven other publicly traded dry bulk shipping companies, most of them produce worse numbers than Star Bulk. Only two other companies post slightly better profits, Scorpio Tankers (NYSE: STNG) and Navios Maritime Holdings (NYSE: NM).
- Annual revenue of $651.56 million, cost of revenue of $593.16 million, yielding a profit of $58.40 million
- Voyage expenses accounted for $129.60 million and vessel operating expenses accounted for $128.87 million
- Annual revenue of $821.37 million (+26.1% YoY), cost of revenue of $837.57 million (+41.2% YoY), yielding a profit of -$16.20 million (-127.7% YoY)
- Voyage expenses accounted for $222.96 million (+72.0% YoY) and vessel operating expenses accounted for $160.06 million (+24.2% YoY)
- Annual revenue of $693.24 million (-15.6% YoY) with a cost of revenue of $683.58 million (-18.3% YoY), yielding a profit of $9.66 million (+159.6% YoY)
- Voyage expenses accounted for $200.06 million (-10.3% YoY) and vessel operating expenses accounted for $178.54 million (+11.5% YoY)
As we can see from the chart below, notwithstanding 2020, revenue has been on an uptrend. However, their expenses have continued to increase due to their continuous acquisition of vessels each year, which in turn increases vessel operating costs. Analysts on the street are predicting for revenue to continue increasing modestly for the next couple of years. They estimate revenue to be $799 million in 2021 and $904 million in 2022.
Star Bulk’s profitability has been hovering between profitability and unprofitability in the past couple of years. Last year, they narrowly squeezed profitability as manufacturing recovered in Q4 that offset a sluggish dry bulk market. Furthermore, many of the unprofitable years that Star Bulk has faced was due to weak demand that was unable to match growing supply. This was a trend that was seen in the 2010s. China, the biggest importer of dry bulk, went through a manufacturing slowdown in the mid-2010s.
To determine whether their profit is sustainable, we have to think about the current outlook and potential catalysts. First, shipping costs have risen over 50% due to rising demand. Manufacturing is also accelerating in other nations as they rebuild stockpiles that were consumed during the pandemic. Additionally, Australia and China are in the middle of a trade war, which has stranded over 70 ships containing 8 million tons of coal. As a result, Australia is sending coal even farther, to places like India which in turn increases the per-mile cost of transportation. On the other side of the globe, the United States and Brazil are leading exporters of soybeans, with China the primary buyers. Last year, China imported 83.2 million tons of soybeans. However, for the first two months of 2021, soybean deliveries were down 0.8% from the same period in 2020 due to rain in Brazil which impacted harvesting. In the short run, it seems there are a lot of catalysts that will lead to higher demand in the dry bulk space that would continue Star Bulk’s profitability for the next couple of years. For those reasons, we believe that they will be profitable for the next couple of years. However, the question of profit sustainability is uncertain in the long run.
Now let’s discuss Star Bulk’s annual earnings per share (EPS). From the chart below, Star Bulk had an EPS of -$3.24, thanks to low revenue from low demand. From 2017 – 2020, the EPS was teeter-totting between slight gains and losses, basically following along with their profits. Star Bulk will be reporting Q1 2021 earnings on May 25th. This will give us a sense of the strength of the dry bulk market in 2021 so far. Analysts are expecting an EPS of $0.40 and revenue of $168.84 million for the first quarter. Furthermore, analysts are estimating an annual EPS of $2.31 for 2021 and $2.72 for 2022. These high EPS estimates likely take into account the projected dry bulk demand.
Although there could be some potential upside, it is just too risky to invest in Star Bulk Carriers. We believe a safer way to invest in the dry bulk space is to invest in the Breakwave Dry Bulk Shipping ETF (NYSEARCA: BDRY), a fund created by Breakwave Advisors that tracks dry bulk shipping stocks. The price moves in this ETF are less volatile than individual dry bulk shipping stocks.