Since the beginning of the year, shares of Cyprus-based shipping company Castor Maritime (NASDAQ:CTRM) stock are up by more than 80%.
As stated in its filings with the SEC back in April, its recent stock increases were “significantly inconsistent” with its performance.
It continues to expand its fleet aggressively, putting immense pressure on its fragile balance sheet. Moreover, it isn’t getting much of a lift from the Baltic Dry Index (BDI), limiting the attractiveness of CTRM stock.
In regaining compliance with Nasdaq’s $1 minimum bid price, the company announced a 1-for-10 reverse stock split of its shares. Reverse splits involve bundling several cheap shares into one bigger share with a higher price tag. Therefore, in reality, CTRM stock lost a substantial portion of its value this month.
Moreover, BDI, which tracks the rates dry bulk haulage companies can charge, dropped 15% in May. A falling BDI complicates matters for Castor, as it will lower profits and result in significant reductions in sales margin.
A Profit In The First Quarter But Who Cares?
Castor recently posted a profit in its first quarter after four straight quarters of posting a loss. Earnings of roughly 2 cents per share were up 103% on a year-over-year basis than its loss of 68 cents in the same period last year.
Its time charter revenues rose 155.3% on a year-over-year basis to $6.97 million, primarily due to vessel additions in the past few quarters. Additionally, its EBITDA of $2.6 million shot up 189% year-over-year and is linked to a reduction in net interest expenses and an increase in operational revenues.
Cash and cash equivalents were at $64.2 million for the quarter, which was substantially higher than the $9.4 million it had back in December.
Since June, Castor has taken deliveries of 14 vessels and expects five acquisitions to close by the fourth quarter this year. At this point, it owns a diversified fleet of 26 vessels with a massive aggregate capacity of 2.2M dwt.
However, with the massive additions to its fleet, you’d expect a hefty increase in the company’s finance costs. On top of that, the BDI continues to drop, which puts immense pressure on the company’s margins. Therefore, it could be looking at a much weaker second quarter and beyond.
Dilution and Price Estimate
CTRM’s share count has increased exponentially in the past year, growing by more than 500%. However, with its reverse stock split, the numbers of shares have effectively reduced from around 899.6 million to 90 million.
The company has established precedence of continuous dilution in funding its fleet expansion. Therefore, I wouldn’t be surprised if its share count starts creeping up again.
The stock is pricey in line with its price metrics and is likely to reverse its course soon.
For example, its price to sales ratio is 4.35 times sales, which is more than 100% higher than the sector median. Additionally, its EV to sales ratio is trading at 16.8 times sales which is also more than 666% times the sector median.
Therefore, with equity dilution and an overblown valuation, it is tough to get excited about the stock regardless of its apparent strides.
Bottom Line on CTRM Stock
CTRM stock’s price movements have largely been detached from its fundamentals for the better part of the year. It continues to aggressively expand its fleet at the expense of its financial flexibility.
Additionally, the volatility in the BDI is essentially a double whammy. Therefore, it would have to raise more equity and debt in a less than ideal business environment. Hence, avoid CTRM stock for now.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.