Adrift in a DryShip
Back in Novemember I posted an article called Ted Eats Fish, which were my thoughts on an article written by Rich Smith.
Several days ago, I was contracted to update my thoughts on one of the stocks in my original post, DryShips, Inc. The contract amount was $250.00, and now that I have completed my contract obligation, I'm free to share my report.
DryShips, Inc. (Nasdaq: DRYS) Financial statement data is based on the company’s latest 20-F filing dated December 2007.
What They Do
DryShips Inc. (DryShips) is a holding company that, through its subsidiaries, is engaged in the ocean transportation services of drybulk cargoes worldwide through the ownership and operation of the drybulk carrier vessels.
At the end of its last fiscal year, the company owned and operated a fleet of 38 vessels and eight new buildings consisting of nine Capesize drybulk carriers (including four new building Capesize drybulk carriers), 33 Panamax drybulk carriers (including two new building Panamax drybulk carriers), two new building Kamsarmax drybulk carriers and two Supramax drybulk carriers.
Its fleet carries a variety of drybulk commodities, including major bulks, such as coal, iron ore and grains, and minor bulks, such as bauxite, phosphate, fertilizers and steel products.
In addition to its owned fleet, DryShips has also chartered-in a Panamax drybulk carrier for a period of three years ending in December 2008. The average age of the vessels in the Company’s fleet is 8.8 years (10 years, 8.6 years and 5.5 years for the Capesize, the Panamax and the Supramax vessels, respectively).
As of April 25, 2008, the Company had acquired a 66.6% interest in Ocean Rig ASA. Ocean Rig is a drilling contractor in the area of offshore exploration, development and production, and operates two ultra deep-water drilling rigs, Leiv Eiriksson and Eirik Raude.
During the year ended December 31, 2007, the company took delivery of 15 second-hand drybulk carrier vessels and disposed 11 drybulk carrier vessels.
The company employs its vessels primarily in the short-term, or spot, charter market, under period time charters, in drybulk carrier pools, and on bareboat charters. Three of the Panamax drybulk carriers in the fleet are operated in a drybulk carrier pool. Thirty-two of its vessels are on time charter. The company's chartered-in vessel is on period time charter that runs concurrently with the time charter-in period, and three of the company’s vessels are on bareboat charter. Each of the company's vessels is owned through a separate wholly owned subsidiary established under the laws of Malta or the Marshall Islands.
DryShips manages the deployment of its fleet between long-term and short-term (spot market) voyage charters, which generally last from several days to several weeks, and long-term time charters and bareboat charters, which can last up to several years.
Under a bareboat charter, the vessel is chartered for a stipulated period of time, which gives the charterer possession and control of the vessel, including the right to appoint the master and the crew. Under bareboat charters, all voyage costs are paid by the company’s customers.
During 2007, the company’s customer, Baumarine AS, accounted for 12% of its voyage revenue. All of the company’s vessels are managed by Cardiff Marine Inc.
DryShips competes with Erato Owning Company, Mentor Owning Company Limited, Iris Owning Company Limited, Panatrade Shipping and Management S.A., Calypso Marine Corp., Oil Transport Investments Limited, Innovative Investments Limited and Ambassador Shipping Corporation.
The company’s principal offices are located in Amaroussion, Greece.
Short-Term Investor (Hold of 1 year or less)
Based on a recent close of $78.50, the stock has First Resistance at $82.78, a 5% increase from recent levels, Second Resistance at $86.72, a 10% decline from recent levels, and First Support at $138.30, a 51% decline from current levels.
Long-Term Investor (Hold of 3-5 years)
The stock is on my watch list with a Reasonable Value Estimate of $62.48, a Buy Target of $31.24, a First Sell Target of $60.92, and a Close Target of $65.95. The stock currently has a Risk Reward Ratio of (2.0).
Investment Fundamentals (Based on annual financial data)
For its most recent fiscal year, the company had Shareholder Equity of $27.91 per share, Earnings of $11.14 per share, and based on a recent close the stock has a trailing twelve-month PE ratio of 7.0.
Also for its most recent fiscal year, the company had a Return on Invested Capital of 18%, Average Free Cash Flow of ($15.06) per share, a Tangible Book Value of $27.91, and paid a $0.77 dividend.
The company has a Cash Conversion Cycle of (6) days, an Enterprise Value of $109.36 per share, and an Equity Value of $47.64 per share, and Total Debt of $33.89 per share.
Investment Ratios (Based on annual financial data)
The company ended its most recent fiscal year with a Current Ratio of 0.64, a Quick Ratio of 0.62, a Cash Ratio of 0.46 a Flow Ratio of 0.95, a Debt to Equity Ratio of 0.1.21, an Acid Test Ratio of 0.50, a Capital Efficiency Ratio of (0.43), and an Inventory to Sales Ratio of 0.01.
My thoughts on individual stock dividends is pretty simple, send me the money. I personally am not interested in re-investing individual equity dividends. But for those of you that are, based on a recent close, the dividend yield for this stock is 1.0%.
My Short-Term Investment Strategy
From a trading perspective, there is more downside than upside, so, at this time, I have no short-term interest in this stock.
My Long-Term Investment Strategy
At this time, I have no long-term interest in the stock, as it currently trading above my reasonable value estimate.
And In Conclusion
You are in a hammock tied between two palm trees, the breeze is blowing softly, the sound of ocean waves crashing against shoreline rocks dulling your senses, when your cell phone rings.
The call is from your bank, they have just received another tax-free check and they need to know in which account to deposit it. You answer their question and resume your peaceful slumber. Ah…life is good.
Sounds like a something out of a movie doesn’t it? Welcome to DryShips, Inc., the Greek dry bulk shipping company with, count ‘em, two, that’s what I said bucko, two, employees.
From the company’s latest 20-F;
“We currently have two employees, our Chief Executive Officer who also acts as the Interim Chief Financial Officer, and our Internal Auditor. Following the resignation of our Chief Financial Officer on May 29, 2007, we are seeking to employ a Chief Financial Officer. We have no plans to hire additional employees.”
It seems that the company sub-contracts everything about the company, except the profits, to a company called Cardiff Marine, Inc., which is oddly enough a DryShips, Inc. affiliated company.
Of course as you can guess, Cardiff Marine, Inc. is a privately held company with no public financial information available.
Again from the company’s latest 20-F;
“We subcontract the commercial and technical management of our fleet, including crewing, maintenance and repair to Cardiff Marine Inc. (“Cardiff”), an affiliated company. 70% of the issued and outstanding capital stock of Cardiff is owned by a foundation which is controlled by Mr. Economou, our Chairman and Chief Executive Officer and a director of our Company. The remaining 30% of the issued and outstanding capital stock of Cardiff is owned by a company controlled by the sister of Mr. Economou. The loss of Cardiff’s services or its failure to perform its obligations to us could materially and adversely affect the results of our operations. Although we may have rights against Cardiff if it defaults on its obligations to us, you will have no recourse against Cardiff. Further, we are required to seek approval from our lenders to change our manager.”
So far, this seems like a pretty good business to be in, at least the way DryShips has it set up. But here’s the best part. The company is, by their interpretation of the law, a tax-exempt company.
From the company’s latest 20-F;
“Under the United States Internal Revenue Code of 1986, or the Code, 50% of the gross shipping income of a vessel-owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States may be subject to a 4% United States federal income tax without allowance for any deductions, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the Treasury Regulations promulgated thereunder.
We expect that we and each of our subsidiaries qualify for this statutory tax exemption and we have taken and intend to continue to take this position for United States federal income tax return reporting purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to United States federal income tax on our United States source income. Due to the factual nature of the issues involved, it is possible that our tax-exempt status or that of any of our subsidiaries may change.
If we or our subsidiaries are not entitled to this exemption under Section 883 for any taxable year, we or our subsidiaries could be subjected for those years to an effective 2% (i.e., 50% of 4%) United States federal income tax on United States-source gross shipping income. The imposition of this taxation could have a negative effect on our business and would result in decreased earnings available for distribution to our shareholders. For the 2007 taxable year, we estimate that our maximum United States federal income tax liability would be $1.13 million if we were to be subject to this taxation.”
See, I told you life was good. The problem, at least in my opinion, is it’s only good for both of the employees of DryShips, Inc.
Everybody else is adrift in dry ship without any oars. Wax