North Carolina-based asset management firm Massif Capital, LLC released its first-quarter investor letter this month – a copy of which is available for download here. The fund was co-founded and is currently being co-managed by Will Thomson and Chip Russell. In their recent letter to investors, Massif Capital announced that the core portfolio was up 3.1% in the first quarter.
In the said letter, Massif Capital highlighted a few stocks and Star Bulk Carriers Corp (NASDAQ:SBLK) is one of them. Star Bulk is a shipping company. Year-to-date, SBLK stock lost 52% and on April 30th it had a closing price of $5.67. Its market cap is of $545 million. Here is what Massif Capital said:
“SBLK is the largest publicly traded dry bulk shipping company, controlling 118 vessels with 13 million tons of combined cargo capacity. Following an aggressive capital spending program to retrofit close to 100% of the firm’s fleet by 2020, SBLK entered the year in a strategically advantageous position. Before the COVID19 crisis took root, debt levels were manageable, and we projected earnings could comfortably cover interest expenses. We anticipated SBLK could generate ~$320 million a year in operating cash flow. With no CAPEX, the firm’s stated dividend policy (absent any share-buybacks and early debt prepayments) had them potentially paying out $140-$150 million in 2020 and 2021, respectively. Margins are excellent compared to industry comparables, with an EBIT margin of ~20%, primarily driven by an industry floor OPEX of ~$4,000 per ship per day. Forward projections give the firm about an 8-9% ROIC and a 10% return on equity over time.
To be clear, recent events have thrown our early 2020 projections out the window. Index data by S&P Global Platts, through the middle of March, showed that the day rate decline visibly pre-dated the coronavirus. Base spot rates have bounced during the outbreak. If there is a negative effect from coronavirus on rates, it isn’t showing up yet in the index data — a potentially ominous sign, given that data from CargoMetrics implies a sharp decline in China’s bulk import appetite. Due to the drop in oil, the benefit associated with investing in scrubbers is not as significant. 10
A bottoming in Chinese imports and exports appears to have occurred on February 15. Cargo flows (measured in terms of mass transferred on/off ships) seems to have reverted to historical norms following the Chinese New Year. Clarksons Securities confirms a similar trend, charting a sharp uptick in Chinese port calls and characterizing it as a “remarkable recovery.” It’s unclear how sustainable these trends are. While the IMO has issued reminders that seafarers are essential to the movement of goods and services, ships are having trouble rotating and supply enough crew onboard to actually execute these journeys.
We don’t have a perspective on the price level at which time-charter rates may normalize, nor what the near-term spread between high sulfur and low sulfur fuel blends might be. We do know that SBLK is wellcapitalized and enters the year having finished a major CAPEX program and maintenance cycle to retrofit their fleet. The firm has the lowest industry operating expenses and has a clear plan to return capital to shareholders. 11 Taking the Bull case off the table (which reflects their earnings power under heightened fuel spread differentials and healthy trade flow), the value of their operating assets less net debt looks to be worth about $1.4 billion vs. a current market cap of $530 million.”
In Q3 2019, the number of bullish hedge fund positions on SBLK stock increased by about 9% from the previous quarter (see the chart here).
Massif Capital’s comments on John Deere
In the said letter, Massif Capital also highlighted Deere & Co (NYSE:DE) stock. John Deere is the brand name of Deere & Company which is farm equipment maker. Here is what Massif Capital said:
“John Deere continues to excel at setting and surpassing their own quarterly expectations. The market rewards them for doing so; their stock appreciated ~7% on the day they announced earnings, even as their underlying financials paint a rather bleak picture. Messaging from senior management focused on the stabilization of the U.S. agriculture industry. The passing of the USMCA and the Phase I trade deal last fall certainly put some life back into their sails, even if it’s not at all clear how accretive this is for the U.S. farmer, let along DE’s income statement. Compared to 2018, DE’s first quarter 2020 net sales (which concluded on January 31 and did not incorporate any of the COVID19 effects) fell 6%, led by their agriculture & turf division falling 4%, construction & forestry falling 10% all balanced out by their financial services division gaining 9%. Total operating profit for the firm fell 16% year-over-year, primarily driven by a sharp 59% drop in the operating profit from construction & forestry.
Deere’s headline acquisition of Wirtigen in 2018 seems to be causing more headwinds than tailwinds thus far. The firm’s 2020 outlook does not provide much relief. Prior to the knowledge that the pandemic would effectively press pause on economic activity for an unknown period of time, both their agriculture and construction divisions were expecting sales to contract 10-15%.”
In Q4 2019, the number of bullish hedge fund positions on DE stock increased by about 22% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
