Stock Safe Bulkers: 3 Reasons It’s Cheap (NYSE: SB)

Iuliia Korniievych /iStock via Getty Images

Today I return to the investment case of Safe Bulkers (NYSE:SB), a Greek shipping company operating in the dry bulk market. In my previous article about the company, I explained why I thought the company presented a great investment opportunity. In this article, I will stick to this view, despite the recent market turmoil. In the following paragraphs, I will provide THREE reasons why I believe the company’s stock price is set to rise in the near future, providing a buying opportunity at the current level.

Reason #1: Seasonality of the Baltic Dry Index

Seasonality of the Baltic Dry Index

Seasonality of the Baltic Dry Index – Created by the author

Tradingview.com

We already know that the first quarters are generally the weakest as far as the dry bulk market is concerned. As we can see in the chart above, since 2014 every first quarter has been marked by a sharp drop in the price of the Baltic Dry Index (BDI). I have not marked the first quarter of 2022 and beyond intentionally, due to the special circumstances associated with the COVID-19 pandemic. Although this pattern can be explained, the point here is how much is too much. Well, using the data from the table above, I created the following diagram.

Percentage decreases in the BDI in Q1 since 2014 - Created by the author

Percentage decreases in the BDI in Q1 since 2014 – Created by the author

Tradingview.com

In there you can see the percentage decrease in the BDI in each first quarter since 2014. If we agree to exempt the years 2020 when the pandemic first appeared and 2021, then so far in 2022 we have a decrease of 60%, from local highs seen in Q4 2021. If we compare this drop to declines seen in other pre-pandemic years, we can see that we are still in the outliers of our period of d analysis, although closer to the lower end. This leads me to believe that the market has already priced in the anticipated tonnage decline in the first quarter of 2022, a reaction that may have been accelerated by factors outside the core of the dry bulk industry, such as the decisions of the FED and the US-Russian crisis. Additionally, there is the Chinese New Year and the Winter Olympics, which affect the iron ore trading segment. However, umbrella companies such as Safe Bulkers or Star Bulk Carriers (NASDAQ: SBLK) see this as a healthy step back while considering current BDI levels to be more than satisfactory, compared to the past decade.

Reason 2: Solid balance sheet with a good CapEx position

Shipping companies are usually heavily indebted and take advantage of the seasonality of the industry to grow over time. Best-in-class shipping companies are also getting the timing right, gearing up for the next shipping cycle. Safe Bulkers is one of these companies, as they took advantage of the exceptionally high freight rates experienced in mid-2021 to reduce their total debt load by 35%, compared to 2020. According to the latest information available, the company now has a full debt. of $447 million and is trading at almost 50% of its book value. Additionally, the company entered into a $100 million credit facility, using the proceeds to acquire six new vessels and refinance their existing loans. According to the CEO of the company, Mr. Adamopoulos, most of the Company’s CapEx is completed with the addition of 6 new vessels and 2 used vessels. Note, however, that the company has an ATM program underway, with approximately $27 million in stock remaining. Although management said they were in no rush to complete it, this should be known to the potential investor.

Reason #3: Macroeconomic targets will support infrastructure projects

Over the past few days, stock markets around the world have experienced very high volatility, fueled in part by international tensions but above all by the anticipation of the Fed raising base interest rates. After dumping tons of cash into economies, central banks have started to pull the strings on inflation, which is already on the rise in many developed economies. However, that’s the easy part. The most difficult thing is to find a solution that also controls inflation while supporting growth. Central banks hate inflation, but they hate stagflation even more. They cannot raise rates and reduce unemployment at the same time. A possible remedy would be to raise interest rates while investing in infrastructure projects that will support economic growth through their multiplier effect. And guess what? Infrastructure projects require raw materials transported by dry bulk carriers. I believe this is a trend that will be unveiled at the end of the first quarter and the beginning of the second quarter of 2022 and which will particularly reward healthy dry bulk companies.

conclusion

Increased seasonality in the dry bulk market, along with macroeconomic decisions pushed Safe Bulkers’ stock price to $3.30. I believe that, based on the three reasons I mentioned above, the company will outperform the market in the coming quarters, if nothing extraordinary happens in the US-Russian conflict. However, the reader should be aware that Safe Bulkers has not paid a dividend to its shareholders since 2015. Income investors may also want to look at the company’s preferred stock, (NYSE: SB.PC) and (NYSE: SB.PD) who have an 8% coupon and are also cumulative, perpetual and redeemable, even if the record date was January 20. Either way, I believe the company has what it takes to outperform the market in the near future.