Costamare (CMRE) stock has been an outperformer in the last 12 months. During this period, the stock has surged by over 200%.
The upside in CMRE stock has been backed by strong fundamental developments. The containership market has been strong. Further, the company’s entry into the dry bulk segment is likely to deliver results.
After a strong rally, some correction seems likely. However, I am bullish on Costamare with strong growth visibility for 2022. (See CMRE stock charts on TipRanks)
Cash Flow Visibility
The global economy has been on a recovery path after the pandemic-driven recession. The containership market seems to be one of the major beneficiaries.
For Q2 2021, Costamare reported a 450% increase in charter rates on a year-over-year basis. An important point to note is that as of July 2021, the company reported contracted revenues of $3.3 billion. Further, the average remaining time-charter duration for the containership fleet is 4.3 years. This provides clear cash flow visibility.
With an attractive market for containerships, the orderbook as a percentage of total fleet has swelled to 21%. However, a majority of the containerships are scheduled for delivery in 2023 and beyond. Therefore, the medium-term demand-supply scenario remains favourable.
Diversification into Dry Bulk
It seems that the company’s diversification into dry bulk shipping is well timed. Recently, the dry bulk Baltic Index reached a 12-year high. With port congestions and a rebound in industrial commodities, the dry bulk market is likely to remain attractive.
As of August 2021, Costamare had an operational dry bulk fleet of 27 vessels. Additionally, the company had 10 vessels that are due for delivery through December 2021.
It’s worth noting that most of the operational fleet is operating with a healthy charter rate. There is likely to be a significant impact of operational dry bulk vessels on cash flows through 2022.
From a supply perspective, Costamare expects dry bulk fleet growth to be subdued over the next two years. This is likely to ensure that charter rates remain firm.
Healthy Financial Profile
It’s worth noting that the dry bulk market is volatile. To maintain a healthy balance sheet, Costamare has maintained low leverage of up to 60% of the value of the assets.
Further, as of Q2 2021, the company reported net debt-to-adjusted EBITDA of 4.54. While leverage seems to be on the higher side, there are two points to note.
First, the company has a strong charter backlog. Therefore, there is clear cash flow visibility for the coming years.
Further, as of Q2 2021, Costamare reported an EBITDA-to-interest coverage ratio of 6.19. Therefore, the debt servicing metric indicates headroom for further leveraging.
Costamare also reported a total liquidity buffer of $353.8 million as of Q2 2021. The increase in leverage due to vessel acquisitions is likely to be associated with an increase in EBITDA and cash flows. The balance sheet metrics are therefore likely to remain strong.
The cash flow visibility is also likely to ensure that dividends sustain. Currently, Costamare has an annualized dividend of $0.48, which implies a healthy yield of 2.6%.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, CMRE stock comes in as a Moderate Buy, with two Buys assigned in the past three months.
The average CMRE price target is $18 per share, implying 14.9% upside potential from current levels.
Final Verdict
Costamare is positioned to benefit from positive industry tailwinds. The acquisition of dry bulk vessels will ensure that revenue and earnings growth are strong through 2022.
Even with aggressive vessel acquisitions, Costamare has maintained a healthy balance sheet. Some correction might be on the cards after a big rally. However, it seems that CMRE stock is positioned to remain in an uptrend.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.
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