Costamare Inc. (NYSE:CMRE) published their Q2 2024 earnings results on July 31.
Despite good results and a surprise with their EPS and revenue results of 7.7% and 73%, respectively, the share price is down by 8%.
In this article, I consider their recent performance during the second quarter, providing you with my view on the contributing factors behind their significant increase in voyage revenue, and their strategic initiatives for the next three years.
I will also provide my rationale behind my Hold rating in the outlook, and conclusion sections.
As always, I will begin with a brief company overview for those readers new to this stock. If you are already familiar with Costamare, feel free to skip to the recent performance section.
Company Overview
Costamare is a Marshall Islands-based company, with headquarters in Monaco, that provides global marine transportation services by leasing out their vessel fleet to major liner companies.
They own containerships, which as the name suggests, carry containerized cargo, and dry bulk vessels, which transport bulk commodities.
Their primary source of revenue comes from charter hire rates, paid by customers who lease their containerships and dry bulk vessels.
In addition to chartering, they provide bareboat leasing services, where the customers are responsible for operating the vessel, including crewing, maintenance, and insurance. This leasing service is provided by their subsidiary, Neptune Maritime Leasing Limited.
I considered including the revenues for their four business segments in the table below.
Segment | 2023 Revenue (in $ million) | 2022 Revenue (in $ million) |
---|---|---|
Container vessels | 839.4 | 797.4 |
Dry bulk vessels | 155.9 | 316.1 |
CBI | 507.2 | 0.4 |
NML (Leasing Business) | 8.9 | 0 |
Other | – | – |
Eliminations | (11.9) | (0.8) |
Total Revenue | 1,502.5 | 1,113.9 |
Table I. Revenue per segment. Author’s compilation from their latest 20-F
As a side note, the other segment aggregates miscellaneous financial items that are not directly related to the main operational segments, and the eliminations segment is an adjustment to remove transactions between segments.
The CBI segment charters vessels from other owners, and then re-charters them to their own customers.
In regards to their ownership, Costamare has 119.46 million outstanding shares, out of which 35.61% are free float.
Recent performance
I considered starting first with the 120% YoY increase in Q2 2024 in charter-in hire costs.
The reason behind this increase is due to higher charter rates for certain dry bulk vessels in 2024 compared to 2023, mainly due to higher than expected cargo demand.
Therefore, management decided to adjust their fleet size by increasing the volume of chartered-in, third-party, dry bulk vessels, under charter agreements through Costamare Bulkers Inc. (CBI).
This increase in their fleet size contributed significantly to the 59% rise in total voyage revenue in H1 2024, compared to the same period in 2023.
So, revenue is up, but did they actually make money? If you read my article on NOVA, you know by now that I highly value companies with high margins over large volumes.
I considered adding a chart below to show the recent evolution of revenue and net income.
Period | Total Voyage Revenue | Net Income | Net Income Available to Common Stockholders |
---|---|---|---|
Q2 2024 | $509.3 million | $102.9 million | $91.3 million |
Q2 2023 | $365.9 million | $67.4 million | $63.2 million |
Table II. Author’s compilation of revenue and net income from their Q2 2024 earnings report.
Given that net income is up by 53% YoY, the increase in charter-in hire expenses does not make me concerned at all. Furthermore, I favor management’s decision to increase the volume of dry bulk chartered-in vessels, as this had a positive effect on their financial results, demonstrating that more volume means more net income.
When looking at their losses, they recorded an expected loss of $2.3 million due to the sale of their dry bulk vessel, Oracle. As a side note, they expect to complete this sale in Q3 2024.
In the long run, I am not concerned about this expected loss. Management is focusing on renewing their dry bulk fleet, to increase operational efficiency.
Part of this strategic shift is the sale of a 2011 built Handysize vessel, and a 2009 built Supramax vessel, while acquiring two newer Capesize ships.
One event that I found slightly concerning was the 29% YoY increase in general and administrative expenses. It seems that Costamare issued shares to a service provider on March 29, and June 28, as part of their compensation, which increased their non cash expenses to a total of $2.5 million.
I want to believe that this was a compensation agreement to align the interests of the service provider with those of the company, in other words, get their skin in the game, but it slightly raised my concern as no more details were provided by management in their Q2 results.
Nevertheless, their cash and cash equivalents reserves look healthy enough for such a small payment, so it doesn’t raise any red flags, in my view.
Speaking of their liquidity, I have included a table below from their Q2 results.
Category | Q2 2023 (in million USD) | Q2 2024 (in million USD) |
---|---|---|
Cash and Cash Equivalents | 745.5 | 894.9 |
Restricted Cash | 10.6 | 7.5 |
Short-term Investments | 17.5 | 18.0 |
Margin Deposits | 13.7 | 10.8 |
Undrawn Funds from Credit Facilities | 100.0 | 115.8 |
Total Liquidity | 887.3 | 1047.0 |
In my view, the company has healthy liquidity levels, despite the $2 billion in total debt.
Outlook
I feel positive about their strategic initiates for the next 3 years, including an achieved 100% employment for the containership fleet in 2024, and 88% for 2025.
I believe that during the second part of this year, the containership employment rate for 2025 will increase to a value close to 100% due to overall market conditions, with higher than expected cargo demand in 2024, and an upward trajectory in charter rates.
I also view positively their new charter arrangements for seven containerships, on a forward basis, for periods ranging from 24 to 36 months, which generated contracted revenues of $224 million.
They also secured new charter arrangements, resulting in $2.4 billion in contracted revenues with a TEU-weighted duration of 3.5 years. In my view, this puts them on the right path for growth in the short and medium term.
As mentioned earlier, their $2 billion debt does not concern me, given their quick ratio of 1.54, and debt to assets ratio of 0.47.
In regards to their financial ratios, their EV/EBITDA, a metric that I pay close attention to during my valuation process, is below the sector and their own 5-year average.
The same happens with the Price to Sales, and Price to Book ratios.
This makes me believe they are undervalued when compared to the sector median, and also their past performance.
Additionally, they have a share buyback program of $30 million for common shares, and $150 million for preferred shares, which I view highly favorable for future share buybacks. As you might know, I pay very close attention to insider buying activity, and share buybacks, as this demonstrates management confidence in the share price.
Price-wise, a quick look at the weekly chart below, shows they are on a pullback after hitting the $18 resistance. In my view, there is a validated support level at $11, and another one, although I have less conviction in this last one, at $12.5.
In my view, in the long term, the share price has a high chance of testing the resistance at the $24 level given their strategic initiatives and recent growth.
However in the short term, I believe it could go down to $11 before it comes back up, therefore my Hold rating.
Conclusion
I consider the recent performance of Costamare to be very positive, following a double digit, YoY increase, in both their voyage revenue and net income.
In my view, their increase in operating expenses is justified, given the higher chartering volumes, due to an increased demand for dry bulk vessels in Q2 2024.
Despite their total debt of $2 billion, their liquidity seems sufficient to manage both their short and long-term debt. I find attractive their quick ratio of 1.54, and debt to assets ratio of 0.47.
In regards to their financial ratios and recent price action, I consider the company to be undervalued given their strong growth in the past year and the good strategic initiatives highlighted in the previous section.
However, their recent share price pullback, which I view as a healthy indication since the RSI was over 80 at the end of May, makes me hold off on entering a long position. I belive the share price could test the $11 mark before it shoots up.
For these reasons, I rate Costamare as a Hold, until the share price stabilizes and, ideally, management begins to buyback shares. I will add Costamare to my watchlist, and I recommend keeping an eye on their Q3 2024 earnings.
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