Eagle Bulk Shipping (NASDAQ: EGLE) owns one of the largest fleets of Supramax dry bulk vessels in the world. Dry bulk vessels are ships specifically designed to move dry cargo, like steel and coal, across long distances, like from the U.S. to China. Supramax vessels are a class of large container ship with a carrying capacity of 50,000 to 60,000 deadweight tons (dwt). Because Supramax vessels are defined by their relative small size, they can access many more ports than their larger vessels. The company takes that capacity and charters its ships for periods of 1 to 3 years, and in doing so skirts some of the day to day volatility of the international shipping market.
Strong growth in China has caused demand for raw materials and ships to transport them to rise. Eagle hasn’t been able to take full advantage of that, because it locks up its ships in long-term contracts. However, Eagle has been expanding its fleet, because it expects demand for dry bulk shipping to continue to rise. Eagle was able to tie up construction contracts before steel prices began their rapid rise, but will have some trouble finding customers for all of its new ships because the entire industry is in rush to build as many ships as possible. Expecting an oversupply of ships in the next two to four years, rates for new long term contracts have begun to fall.  The question for the future is whether they’ll continue along their descent, or whether unexpected growth in Asia will shore up slack demand and cause prices to reverse.
Two elements of Eagle's business strategy differentiates it from competitors. First, it tries to reduce volatility in revenue and expenses as much as possible. It does so by entering into long term contracts, and passing on expenses like fuel onto its customers. Having secure cash flows lets it take on large amounts of debt without having to worry about being unable to meet financial agreements. The tradeoff is that once the company has locked in the spread between costs and revenues, it is unable to capture unexpected rate increases on the spot market.
The second way that Eagle seeks to differentiate itself from competitors is by focusing on a subsection of a subsection of the industry. Eagle focuses on Supramax sized vessels, which are a subtype of Handymax vessels. Handymax vessels can pass through all large canals, and can unload their cargo themselves at many docks. Supramax vessels are large Handymaxes.
Revenue increased +37.6% YoY to $265.0 million.
Operating Income increased +15.8% YoY to $75.7 million. Operating profit margin declined to 28.6% vs. 34.0% in FY 2009. The majority of the decline in OPM was due to increased vessel expenses ($22.8 million) and increased depreciation expenses ($18.6 million). Fixed costs (general & administrative expenses) as a proportion to sales continued to decline YoY (15.1% in FY 2010, vs. 17.0% in FY 2009 and 18.7% in FY 2008).
The increase in depreciation and vessel expenses is arguably an expected result from the increase in fleet size (the company accepted deliveries of 12 ships during FY 2010).
Net Income declined -19.5% YoY to $26.8 million. Net margin declined to 10.1% vs. 17.3% in FY 2009. The majority of the decline was due to an increase in interest expense (an increase of about $20 million YoY).
Revenue increased +42.6% YoY to $192.6 million.
Operating Income declined -14.8% YoY to $65.4 million. Operating profit margin declined to 34.0% vs. 41.4% in FY 2008. The majority of the decline in OPM was due to increased vessel expenses ($13.9 million) and increased depreciation expenses ($10.4 million). Fixed costs (general & administrative expenses) as a proportion to sales declined to 17.0% vs. 18.7% in FY 2008.
Net Income declined -5.5% YoY to $33.3 million. Net margin declined to 17.3% vs. 33.2% in FY 2008. The majority of the decline was due to an increase in interest expense ($13.1 million).
The company terminated its quarterly dividend payments in 2008 following the addition of an additional convenant to its Revolving Credit Facility.  The additional covenant stipulated that dividend payments could only be made when the collateral value (ships) exceeded the borrowing amount by 30% (ship values of $1.30 for every $1.00 outstanding). Therefore a recovery in ship valuations would be a precondition to a reinstatement of the dividend.
As of FY 2010, the company reported $1.1 billion of long term debt ($990.8 million for vessels in operation, and $160.5 million for newbuilds). The company's weighted average cost of debt was 5.15%.
Other contractural obligations as of FY 2010 were as follows:
Eagle operates through only one business segment through which it carries out its shipping operations.
Strong growth in Asia, mostly in China, has caused demand for raw materials to skyrocket. Unable to extract the necessary resources domestically, China has turned to imports from other countries. With demand on the rise, the Baltic Dry Index (BDI) has doubled in only two years.The BDI is a daily average of the prices required by shipping companies on the Baltic Exchange to transport raw materials across the sea. The Baltic Exchange is a global marketplace for brokering dry cargo shipping contracts.
All of Eagle’s ships are Handysize. To take advantage of rising demand, Eagle has been expanding its fleet. The problem is that every other company in the industry has been expanding their fleet as well.
Rising Chinese demand for iron ore has pushed up dry bulk shipping rates. It has also boosted the value of Eagle’s current fleet. That isn’t because the size of Eagle’s fleet increased or because its fleet was becoming old. Since 2004 the average age of Eagle's fleet hasn't changed, and since 2005 Eagle has only purchased 5 new ships. While all of this is a good thing, it also means that shipbuilding costs have been increasing, making future ship expansion more expensive. Prices for steel plates, which are used to build ships, have risen by up to 83% during that same time period. Some of that rise will be absorbed by shipbuilders, and some of it won’t. For Eagle, shipbuilders will be paying for that increase. Future fleet expansion, however, will be more expensive.
Because of the size and efficacy of the Baltic Exchange, competition in the dry bulk shipping industry is fierce, and is based primarily on price. However, Eagle has an advantage. The average age of a Handymax vessel worldwide is 15 years. The average age of Eagle's fleet, which consists entirely of Handymax vessels, is just 6 years. A young, modern fleet is more attractive to potential customers than an old one for two reasons: a young fleet is typically more efficient (lower operating expenses, like fuel costs and maintenance), and the incidence of accidents are lower with a young fleet (reducing delays, loss or damage of cargo, and environmental impact), which can reduce insurance costs.
Eagle has another advantage. While fuel costs have been rising, margins have been falling. Not so for Eagle, which passes on the burden of paying for fuel to its customers. Eagle’s only major disadvantage is its small size compared to the shipping majors. With its aggressive growth strategy, that's poised to change.
EGLE's competitors include: