The shipping industry may be in for a slowdown. It’s already lost pace from the frenzied demand that arose a couple of years ago with freight rates collapsing. Whether that slowdown will become a prolonged downturn is still up in the air because it’s still murky how economic conditions will affect the industry in 2024.
Even if demand isn’t hitting similar levels to a few years ago, Star Bulk Carriers (NASDAQ: SBLK) has used its profits from years past to set itself up for future success. The company invested its windfall into renewing its fleet and paying down its debt. Investors began to take note of the company’s forward strides in the last half of 2023 when Star Bulk shares gained 20%.
The dry bulk shipper, which is based in Greece, has been a better 5-year investment than the S&P 500. Star Bulk Carriers has returned over 141% compared to the benchmark’s 91% 5-year return. Gains coupled with a consistent dividend might make SBLK look like a can’t-lose proposition.
However, the dividend has dropped over the year in step with the shipper’s profits. And all the positivity might seem premature for a company that tallied nearly 39% less revenue in the 3rd quarter than it did in the same quarter a year ago. But those declines seem tied to external factors as Star Bulk used the end of the year to upgrade its fleet and pull off a massive merger.
So is Star Bulk Carriers stock a buy?
What Made Star Bulk Carriers Stock Increase?
That merger, announced in December, was a $2.1 billion deal with Connecticut-based Eagle Bulk Shipping. The combined company will be the biggest dry bulk shipping entity that’s listed on a US exchange. It increased the company’s considerable fleet to a total of 169 vessels.
Around 97% of those ships are already equipped with scrubbers. Scrubbers allow ships to burn cheaper fuel and still emit less pollutants than conventional vessels. The Eagle merger doesn’t just bring Star Bulk Carriers more ships. It will also increase the company’s liquidity to $420 million when the deal goes through in mid-2024.
Leverage should also be reduced to a much more manageable 37%. Increased synergy inside the combined company is expected to cut total expenses over the next 12-18 months by $500 million.
The merger announcement came on the heels of the news that the shipping giant bought back 10 million shares in early December. That was another sign of Star Bulk’s strength, especially after the company just bought back the same number of shares in late October.
Star Bulk Carriers also announced a dividend of $0.22 for the quarter, and while that may be somewhat less than quarters past, it’s still a respectable 4.17% annual yield.
Will Star Bulk Stock Keep Going Up?
The dividend is just a part of the bull case for SBLK as are the announcements of the merger and the stock repurchases. There were plenty of other positives in the company’s 3rd quarter of 2023 earnings namely revenue of $223 million, which was 8.13% better than analysts expected, albeit it was lower than the equivalent figure last year.
Earnings per share smashed estimates by 39% in the quarter, but diluted EPS of $0.43 was 60% less than the company delivered in the same quarter of 2022. While that was attributed to softer demand, lagging revenue and diminishing earnings could be a concern if they linger past the early months of 2024.
Star Bulk hopes to avoid that scenario by optimizing its fleet. The company placed an order for two new top-of-the-line vessels to be built in Chinese shipyards in 2024. Star Bulk already boasts a fleet with an average age of less than 10 years, which makes it one of the most cost-effective bulk shippers in the world.
The shipper also lowered its fleet’s age by selling off 5 vessels that were beginning to deteriorate. Star Bulk’s dedication to streamlining its fleet, lowering its debt, and taking advantage of expansion opportunities makes SBLK stock all the more appealing to long-term investors.
Is Star Bulk Stock Undervalued?
Star Bulk Carriers is 12.6% undervalued according to the consensus of nine analysts who place fair value at $24 per share.
No sell ratings exist on SBLK currently, but there is one Hold recommendation. Eight out of nine analysts rate the stock as a buy, and the highest forecast predicts Star Bulk shares will jump by 22.5% in 2024 to reach $26.10 per share. The lowest forecast estimates that the stock will drop 6.1% to $20 over the coming year.
The company’s P/E ratio of 3.3x also seems to back up the valuation assessment. That’s far lower than many of the top shipping companies, which have P/E values above 15x. It’s another positive sign that the stock is still trading below its 52-week high of $25 per share. All of those factors point to Star Bulk still being on sale.
The dividend is another selling point, though it’s concerning that the company has consistently dropped it all year. The $0.22 quarterly dividend is 81% less than last year’s dividend of $1.20. Still, the company has proven it will increase its payout if its earnings improve.
Is Star Bulk Carriers Stock a Buy or Sell?
No immediate factors appear to hold the stock back now. In fact, all signs point in the opposite direction. The company has used its earnings from 2022 to set itself up nicely for the years to come. The merger should only keep Star Bulk sailing on course.
If there is a concern, lagging demand over the next 12 months is it. While economic conditions are far from certain, the company appears to be prepared to weather short-term headwinds.
It all makes SBLK an appealing buy for long-term investors who believe the economic slowdown affecting the shipping industry is due to turn around next year.
#1 Stock For The Next 7 Days
When Financhill publishes its #1 stock, listen up. After all, the #1 stock is the cream of the crop, even when markets crash.
Financhill just revealed its top stock for investors right now... so there's no better time to claim your slice of the pie.
See The #1 Stock Now >>The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.