Happy Labor Day! I hope you’re enjoying this last little bit of summer a little more than we are here on the East Coast. And with you always at the front of my mind, Sleuth reader, I braved the soggy remnants of Ernesto to bring you today’s official end-of-summer Sleuth.

As you probably remember, I’ve been examining reader picks every month this summer. First, I wrote about XsunX (XSNX.OB: OTC BB), developers of a new type of solar power technology that could turn ordinary windows into miniature power plants. Next I looked at an exploration-stage mining company called Tao Minerals (TAOL.OB: OTC BB). If you missed the write-ups, you can view them here and here.

To be honest, I wasn’t a big fan of either of these companies. XsunX — while I am intrigued by the technology — has yet to make a dime, and Tao has no proven commercial mineral reserves (or cash, for that matter). So it’s my pleasure this week to bring to you a reader pick that is not only making some money, but also handing out a pretty hefty dividend.

The company is Eagle Bulk Shipping Inc. (EGLE: NASDAQ), a $574 million worldwide dry goods shipping business.

Eagle Bulk Shipping is a holding company for its wholly owned subsidiaries that charter big boats that carry dry goods such as iron ore, coal, grain, cement and fertilizer. It is also the largest U.S.-based owner of a dry bulk vessel called a “Handymax.” The fleet is mostly made up of the “Supramax” class vessels, “a larger and more efficient Handymax design that enjoys strong demand from customers around the world,” according to Eagle’s website.

Eagle holds a competitive advantage over other bulk shipping fleets because its ships are relatively brand new, according to a company filing. And newer ships means less dry-docking fees and maintenance — thus increasing the company’s profits.

The company employs a long-term chartering strategy — that is, they essentially lease their giant ships for several months to years at a time. According to company filings, long-term chartering helps the company maintain predictable revenue. In fact, only one charter is expiring in 2006 throughout Eagle’s entire fleet. The rest expire either sometime in 2007 or 2008.

This means predictable, stable income for the immediate future. If you want to get a good idea of how Eagle’s earnings will shape up for any given quarter, it’s in your best interest to check on a listing of its outstanding contracts and when they expire. This list can be found in the company’s 10-Q or 10-K filings.

Monster dividends are probably what attract investors to this stock. Eagle gives its shareholders around 50 cents a share every recent quarter in dividend payments — that’s about $2 a year. This is huge since the share price is only a little less than $16. That’s a little more than 12% a year.

While the dividends look tempting, it’s important to remember that Eagle Bulk Shipping is a young company, and it is also at the mercy of shipping cycles and the economy. So don’t run out and purchase shares thinking you’re in for a guaranteed 12% a year on dividends alone.

It’s company policy to declare dividends in amounts up to its quarterly earnings before interest, taxes, depreciation and amortization, less maintenance and dry docking costs as long as the company doesn’t breach its loan contract. So Eagle will give to shareholders when it can. But if revenues drop, don’t be expecting any free cash.

Even after paying out the big dividends, Eagle has managed to more than double its cash since the beginning of the year. As of the end of the second quarter, the company was sitting on $54.5 million in cash. On Dec. 31, 2005, the company reported having $24.5 million in cash.

Second quarter revenues also more than doubled compared to last year, up from $10.6 million to $24.1 million. Eagle’s multiple is 12.8, a little below the industry average of 13.7. So on the surface, all of the company’s numbers look pretty good. The one thing I could do without would be the company’s building debt, which is up to $182.4 million.

Something else to worry about with Eagle could be dilution. It’s a young company — Eagle Bulk Shipping Inc. started trading in the summer of 2005 — and it will need to fund the purchase of new vessels to grow. A portion of a recent private placement was used to help pay for three new vessels (Eagle currently has 16 ships with an average age under six years).

All in all, Eagle Shipping is a speculative play. It’s too young to have a consistent track record of positive earnings growth, yet it has shown four straight quarters of decent earnings. If it can continue acquiring vessels while controlling its debt, Eagle could become a powerful growth stock sometime in the near future.

Best,

Gunner
September 04, 2006

Greg Guenthner

Greg Guenthner uses his experience as a former journalist to dig up the hard-to-find headlines that could lead to big gains for your micro-cap portfolio. Greg offers his readers the scoop on topics ranging from alternative energies to biotechnology, digging up the best penny stock opportunities before they’re discovered by the mainstream media. On top of contributing to Penny Sleuth, Greg also heads Penny Stock Fortunes and Bulletin Board Elite.

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