We initiate coverage for Excel Maritime Carriers Ltd. (EXM) with a Neutral recommendation, which means the stock will perform mostly in line with the broader market. The company reported mixed financial results for the second quarter of 2010. Revenues beat the Zacks Consensus Estimate but EPS fell below it.
The company has a number of competitive strengths, like experienced management team, strong customer relationships, and cost-efficient operations. The surging BDI (Baltic Dry Index) predicts that the shipping sector may witness a rebound in the second half of 2010.
Nevertheless, we remain concerned regarding Excel Maritime’s large exposure to spot rates, which are subject to high fluctuations. Although the global economy is improving, it is still not out of danger. Adverse changes in demand and supply for vessel capacity and exchange rate volatility are other concerns.
Excel Maritime is expanding operations both organically and through effective acquisitions. The acquisition of Quintana, which added 29 young and well-maintained dry bulk carriers, placed the company as one of the largest dry bulk transporters of the U.S. Management has undertaken a balanced fleet deployment strategy of spot and period time charters that seek to maximize charter revenue throughout industry cycles, while maintaining cash flow stability.
However, the dry bulk shipping industry is highly cyclical together with volatility in charter-hire rates and profitability. Moreover, the business is strongly capital-intensive and its future success will depend on Excel Maritime’s ability to maintain a high-quality fleet through the acquisition of newer dry bulk carriers and the selective sale of older dry bulk carriers. The company may not be able to employ its vessels upon the termination of their existing charters at their current charter-hire rates.