Star Bulk (SBLK) Stock Is a Good Buy in Cyclical Shipping Industry

Shipping stocks are having a joyride and quite literally so. Star Bulk Carriers Corp. (SBLK) stock is up over 157 percent YTD. Castor Maritime (CTRM), which is on an expansion spree fueled by debt and equity issuance, is up almost 97 percent. What’s the forecast for SBLK in 2021? Should you buy or sell the stock now?

SBLK stock is trading near its 52-week highs. However, the stock was lower in pre-market trading on May 25. CTRM was higher after plunging the previous day. The company announced a reverse stock split, which would help it meet the minimum Nasdaq listing requirements.

SBLK stock has been rising amid a broad-based rally in shipping companies. Shipping is a very cyclical business and we're in a cyclical upturn. The demand for dry bulk commodities including iron ore, steel, coal, and agricultural products, is running high amid a booming global economy.

Meanwhile, shipping rates have risen and continue to rise amid strong demand. Shipping rates have a major bearing on shipping companies’ earnings. Star Bulk’s earnings rose over 12-fold in the first quarter of 2021 compared to the same period in 2020. The company sees even better days ahead. Higher shipping rates and strong demand would keep its cash registers ringing.

During the earnings call for the first quarter of 2021, Star Bulk management announced the resumption of dividends and the company revised its dividend policy. It will pay a dividend of $0.30 for the first quarter. The dividend might increase in the second quarter.

According to the estimates compiled by CNN Business, SBLK has a median target price of $25, which is a 10 percent premium over the current prices. Its lowest target price of $10 is a 56 percent downside, while the highest target price of $40 is a 76 percent premium over the current prices.

Wall Street has been getting bullish in Star Bulk stock. In May, Jefferies lifted its target price by $3 to $25, while Deutsche Bank raised its target price from $18 to $40. SBLK released its earnings for the first quarter of 2021 last week. While the company’s top-line performance was better than expected, its earnings missed the estimates.

Currently, SBLK stock trades at an NTM EV-to-EBITDA multiple of 5.20x. The multiple has averaged 6.7x over the last three years with a high of 12.6x and a low of 4.3x. Here it's worth noting that the valuation multiples of cyclical companies tend to be lower at the cyclical peaks since their earnings are higher.

While Star Bulk's earnings-based valuation multiples are currently lower than historical multiples, its asset-based valuation portrays a different picture. Star Bulk stock has a price-to-book value multiple of 1.36x, while the multiple has averaged 0.6x over the last three years.

Shipping companies' valuation multiples were depressed over the last three years. President Trump’s trade wars had a negative impact on global trade. The COVID-19 pandemic also impacted global trade.

While Star Bulk stock is currently trading near its 52-week highs, it has room to run higher. We’re in a commodity supercycle, which bodes well for shipping companies like SBLK. Higher demand for dry bulk commodities and shipping companies is here to stay for some time. SBLK stock looks a good buy at these prices and a solid way to play the cyclical shipping industry.