Star Bulk Carriers: Financial Strength And A High Yield

The global shipping industry has been volatile in the past year. Following turmoil in supply chains during the pandemic and geopolitical upheaval in 2022 in the wake of Russia’s invasion of Ukraine, price volatility has come about in the Drewry World Container Index.

The good news for investors in many Marine Transportation industry companies is that the cost to move goods, particularly within the dry bulk segment, has generally been moving higher from 12 months ago. Prices put in at least a near-term peak in July, perhaps amid worries about the health of the global economy.

I have a buy rating on one of the industry’s major players: Star Bulk Carriers (NASDAQ:SBLK). While the company is certainly susceptible to macro developments, its financial position is strong, allowing it to pay high dividends to shareholders, while the fundamental valuation is attractive.

Earlier this year, SBLK’s management team issued an optimistic outlook on the state of its dry bulk activities, pointing out full-year growth. I will highlight at the end of the article, however, some concerns on the chart as we head into the end of the 2024.

Dry Bulk Ton-Miles Expected To Rise in 2024

Back in August, Star Bulk reported a mixed set of quarterly results. Q2 non-GAAP EPS of $0.78 missed the Wall Street consensus forecast by a nickel while revenue of $353 million, up 48% from year-ago levels, was a material $83 million beat. While shares were about unchanged in the session that followed, the company posted $106 million in net income with $89 million in adjusted net income while issuing a solid, though sequentially lower, $0.70 quarterly dividend.

So far in 2024, 10 vessels have been sold by the $2.4 billion market cap company, and the Eagle Bulk acquisition was completed during the first half. With liquidity now standing at $516 million, $486 million of that being in cash, I see Star Bulk as being in a good standing to weather any potential macro or industry-specific volatility in the quarters to come.

So long as demand for dry bulk and other shipping activities persists, SBLK’s new synergies with the Eagle Bulk integration should be earnings accretive in my view. In the meantime, investors are paid to wait on steadier profit trends in the years to come with its robust dividend policy, among the best among its competitors, and a generally clean balance sheet.

Star Bulk Dividend Policy

Key risks include ongoing economic weakness in China. With falling steel production and weak energy demand out of the world’s second-largest economy, there could be pressure on shipping rates and demand for transportation in the quarter ahead. Several investment banks recently took down their outlook for China’s GDP as more data comes in for 2024. A decline in coal trade volume could also hamper SBLK’s performance, while any increase in geopolitical conflicts would be a negative fundamental catalyst, too.

On the earnings outlook, operating EPS is expected to be steady just under $4 per share over the next two years. That gives us a rather good idea of how to value shares – recent annual volatility in non-GAAP per-share profits has made valuing SBLK challenging. On the top line, revenue is likely to rise at a decent clip in the out year and through 2025.

For the Q3 report due out in August, analysts expect $0.75 of normalized EPS on revenue of $273 million – both figures would be massive YoY jumps ($0.34 and $165.5 million in Q3 2023).

SBLK: EPS Seen Near $4 In The Next Two Years, Rising Revenue

On valuation, SBLK’s current P/E ratio is very depressed versus history, but its price-to-sales multiple suggests the valuation is about fair. On an EV/EBITDA basis, SBLK looks cheap by about 10%.

If we assume normalized EPS of $3.75 over the next 12 months and apply a 7x P/E, which I assert is warranted with muted profit growth beyond next year, then shares should be near $26.25.

SBLK: Favorable Valuation Metrics, Cheap on Earnings

Compared to its peers, Star Bulks sports a very strong valuation rating, while its growth trajectory has been healthy. Profitability trends are likewise impressive, highlighted by free cash flow per share of $3.86, close to 19% of the current share price.

But share-price momentum has been light in recent months – the stock is down about 25% from its Q2 peak. Finally, EPS revisions from the sellside have been mixed, with three downgrades compared to a single upgrade. Deutsche Bank made headlines earlier this week, coming out in support of SBLK.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q3 2024 earnings date of Tuesday, November 19, after market close. Before that, be on guard for potential volatility, as Star Bulk’s management team is expected to present at the Capital Link 14th Annual Operational Excellence in Shipping Forum 2024 later this month.

Corporate Event Risk Calendar

The Technical Take

With mixed industry trends and a favorable valuation, SBLK’s technical situation is mixed. Notice in the chart below that shares are now in a trading range with support between $16 and $17 while resistance is apparent just below the $28 mark. Just recently, a bearish death cross in which the short-term 50-day moving average crossed below the long-term 200-day moving average was a negative development. Bigger picture, the 200dma is now flattening out in its slope, suggesting that the bulls are losing their control over the primary trend.

Also, take a look at the RSI momentum oscillator at the top of the graph – it has been ranging between 20 and 50, a notably bearish zone. Moreover, with a high amount of volume by price from the high teens up to the mid-$20s, there is a lot of congestion at current levels, cementing the reality of a lack of either an uptrend or a downtrend.

Overall, SBLK is rangebound, as shares may approach key support in the months ahead.

SBLK: Emerging Trading Range, Support Near $17

The Bottom Line

I have a buy rating on SBLK. While the chart is mildly concerning today, the valuation is attractive, and the yield story is compelling. Buying on a dip to about $18 could be an opportunity heading into 2025.