MALCOLM LOWENTHAL
FIRST VICE PRESIDENT
KERN, SUSLOW SECURITIES

COMPANY: Eagle Bulk Shipping
TICKER: EGLE (Nasdaq)
PRICE: $12.73 (as of 4 p.m. yesterday)
52-WEEK RANGE: $11.78-$17.85
MARKET CAPITALIZATION: $415.6 million

Malcolm Lowenthal is the first vice president of Kern, Suslow Securities, and has more than 40 years of investment experience. On January 18, Mr. Lowenthal spoke to David Dalley of The New York Sun about Elizabeth Arden, and recommended it as a buy at $19.92. Five weeks later, the stock is trading at about $23.35, up by more than 17%. Today, Mr. Lowenthal talks about another of his favorites, Eagle Bulk Shipping.

What does Eagle Bulk do?

They own a series of bulk shipping tankers – 13 in all. They ship cargo like grains, coal, steel, and iron ore around the world, especially to China and India.

Why do you like it?

Right now the market for container shipping is not great. Rates are coming down, but in my mind, and especially in the case of this stock, that creates an opportunity. And even in this negative business environment, the yield is still substantial.

They just went ex-dividend. The quarterly dividend was 57 cents, which is about a 15% return, and I think it’s realistic to expect the yield to stay at around that level. They pay out all of their earnings in dividends.

How will they maintain the yield if rates are dropping?

Most of their ships, 76%, are on long-term lease, so they don’t have to go into the spot market, which is where the weakness is dramatic. This business in general is a highly cyclical business. Right now the pricing cycle is negative. But I expect that it’s going to change over the next two to three years.

What will push rates back up?

What has happened is that the market has been very strong. And when demand is up, more and more ships come onto the market. That creates an oversupply of ships.

Now the average life of a ship, very roughly, is about 25 years. About 5% of the ships that are currently on the market are scrapped each year. So at some point supply will level off with demand, and rates will increase again.

The stock is trading at about the same price it was when it went public last summer. It rose briefly but fell back. Why isn’t it doing better?

A little while ago, Salomon Smith Barney issued a downgrade and that affected it negatively. But in my opinion, the downgrade was completely unwarranted. The thinking in the report was flawed.

I think that the stock is undervalued today, perhaps not dramatically, but still undervalued. Fair value, in my opinion, is around the high teens. It won’t really take off until rates change – but in the meantime I’m getting paid one hell of a dividend for my patience.

Why did SSB downgrade the stock?

They basically said that there’s been a 25% reduction in the net asset value of the company since it went public. The report valued the company based upon the scrap value of their ships, and the price of scrap steel has come down 25%. That’s a valid way of valuing shipping companies in some cases, but not here. It’s meaningless because Eagle’s ships are new. They have 13, 10 of which were built post-2000. Two were built in 1995 and 1997, and only one is from 1984. So what difference does it make what the scrap value is? They’re not going to scrap these ships – their value is far greater than just the materials. As far as I’m concerned, the downgrade just provides a great buying opportunity.