Thursday, March 5, 2009

Some cheer for Eagle (EGLE)

Eagle (EGLE) deserves a break given the beating it has taken lately on its share value. There has been some steady improvement in the Baltic Shipping Index, but 2009 remains a difficult year to predict. Eagle has made some progress, but the the shipping crisis is not yet over. It is also faces some formidable competitors.

Natasha Boyden's upgrade plus a general market short-covering rally led to a phenomenal bounce in Eagle's value. There is currently amazing market volatility in shipping share prices.

Yet Eagle reported fourth-quarter profits of US$9.16 mio, down from US$16.3 mio a year earlier. Operating expenses leapt by 139% to US$43.5 mio. The company finished the year with US$9.21 mio in cash out of US$1.36 bn in assets. It had US$790 mio in long-term debt.

I have sometimes been at loggerheads with Boyden. My views tend to be closer to Jonathan Chappell at JO Morgan, who has done some interesting analysis on free cash flow (FCF) as a means of stock evaluation. In these treacherous markets where there is high risk of bank and charterer defaults, I feel this is an especially important indicator.

In this case, I think that Boyden has things pretty much on the mark with EGLE by revising her price target down to US$ 3 and repeating her concerns about company debt, but maintaining optimism about Eagle Bulk's strategy and supramax focus. I would add that EGLE has a good management team.

In a larger perspective, however, EGLE has formidable competition. Larger and longer established groups like Norden and Pacific Basin have stronger balance sheets and more fleet diversity. Where they really outshine EGLE is their very strong employment portfolios and direct end-user relationships. They also have greater economies of scale and lower operating costs. Pacific Basin, for example, is located in Hong Kong and uses extensively Chinese crew.

On the other hand, they have got more exposure on new buildings (albeit their finance needs are covered) than EGLE and extra liabilities from chartered-in vessels.

All of these companies have their hands full in maintaining employment at rates that give them a comfortable cash margin and renegotiations with the yards to push out new building delivery dates and possibly get some price reductions.

DnB NOR Bank projects net (less scrapping) Handymax fleet growth to be a record 21.7 %and 16.8% respectively in 2009 and 2010. So these are challenging times in this current slow growth environment, waiting for various government stimulus plans to have effect.

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