XMFSamstevens (37.90)

Reexamination Day 7: Star Bulk Carriers (SBLK)

May 05, 2011 – Comments (0) | RELATED TICKERS: SBLK

So I'm just dropping the "Daily" because its been anything but that recently. I should have some more time this coming month so hopefully these will be more regular (My scorecard has been suffering recently so it'd be nice to start purging at a faster rate).

I picked Star Bulk Carriers at a time when I knew basically nothing about investing and at a time just before the dry bulk shipping industry took a giant nose dive (go figure). I saw a company with a low trailing p/e but didn't see the fact that SBLK's earnings were about to basically disappear because of the recession and oversupplying in the shipping industry (people stopped building stuff in 2008, but even if they hadn't, there was probably too much supply anyways). And it's been a nightmare. I'm currently sitting at a -90 having given it the Green thumb, so presumably I don't have that much too lose here (if it goes to 0, i.e. loses 100% from today I only lose about 50 points. I basically have a handicap having already lost so much on it, which is one of the reason I've kept so many losers, as in CAPS Green thumb picks that are losers are handicapped to do well).

I read an interesting article on how to value Dry Bulk Shipping companies here:http://seekingalpha.com/article/264710-a-look-at-dry-bulk-company-valuations?source=TheMotleyFool (not sure if you'll be able to read it, sorry, but its by J Bruun)

Quantitative: One of the reasons I loved this company (and a reason I still like it) is it's incredibly low Price/Book, currently at 0.31. It's earnings have been all over the place but, as talked about in the aforementioned article, a lot of what matters with shipping companies is the value of their assets, maybe moreso than past earnings because its a nearly perfect market because none of the companies have significant competetive advantages over each other (they're just ships, and there's only so fast they can go, so as long as they're reliable it doesn't matter what ship you use). SBLK also pays a nice dividend of over 8%, despite the recent mess its been in. Their debt is actually pretty low with LT Debt/Equity only at 0.35.

When I look at this company, I go straight to their balance sheet to see what they're worth. The plant property and equipment, the stuff they could in theory just sell off, makes up 96% of their assets. This is probably true of all dry bulk companies, but this one has a very low price/book and a nice dividend, making it stand out in my mind. If you include cash and subtract liabilities that's $576 million in net, concrete value. And yet the market cap is under $150 million. Calculate that figure for another drybulk company like DryShips(DRYS) and the figures (that thing i just made up and called "concrete value" vs market cap) are about equal. Point is, it looks really undervalued to me. But as I've seen so many times before, that really doesn't matter all that much.

Qualitative: As I explained before it's been difficult for me to find a good qualitative analysis of why SBLK is better than other drybulk shipping companies. I guess a good place to start is by looking at their fleet. According to their website, they have 11 active ships and agreements (whatever that means) to build two more. total capacity is 1,287,686 deadweight tons, and the average age of the ships is about 10 years, which doesn't seem all that old to me. I would trust stuff made in 2000 for a long time.

More important than the fleet itself, however, is whether or not all these ships are going to be under contract for a long time, because unused ships are gonna rack up huge losses. But ships that are under contract bring in surefire cash, which is good. Their two biggest ships are under charter through mid-late 2013, which is nice. Unfortunately all but one of the other ones' contracts expire this year, mostly in the fall. This could be bad since the prices they're gonna get on new charters, if any, are not going to be very good (their oldest charters are worth significantly more. This is a huge problem. With as much oversupply as there is, its could be hard for anyone to break even.

Verdict: This is a really bad sector with massive oversupply and demand that's just starting to pick up. I'm not sure how long it will take for things to loosen up in the drybulk sector but despite all that, I'm going to keep this pick, primarily because I've already lost so much and because of the handicap I explained above. I would not, however, reccommend picking this stock now if you hadn't already lost a lot on it.