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Adrift in a DryShip

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June 21, 2008 – Comments (15) | RELATED TICKERS: DRYS , DSX

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.

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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.

Dividends

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

15 Comments – Post Your Own

#1) On June 21, 2008 at 1:42 PM, abitare (33.66) wrote:


There is a reason many Top Fools gave Dryships an Underperform. You can take your pick of article and realize how funny this company is.

Curious George
Nathan Vardi 02.25.08, 12:00 AM ET

http://www.forbes.com/forbes/2008/0225/095.html

World's Scariest Stock: DryShips
http://www.fool.com/investing/small-cap/2007/10/29/dryshi......

Dryships’ Debut Shows Speculation,
Liquidity Trumping Experience
“It was surreal. When someone asked why he was doing the deal, here–now, he actually said, basically, ‘Because Americans are the dumbest investors around, and there’s lots of liquidity in this market.’”
http://www.weedenco.com/welling/archive/sb/v07i04sblogo.asp

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#2) On June 21, 2008 at 1:49 PM, LordZ wrote:

Are all dryshippers the same...

It looks like they are all doing the same thing.

they have another company that is owned by its insiders

who manage everything ???

IS THIS THE NORM

or is it the exception

LOOKS like SB, ESEA have similiar models to DRYS

or am I wrong ???

 

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#3) On June 21, 2008 at 3:39 PM, abitare (33.66) wrote:

LordZ,

Actually, there are about 5000 + commercial ships. When a guy + his girlfriend borrow to buy 30ish ships, that should not make them BILLIONAIRES (DRYS) Most, shipping companies are owned by private families, nation states and private companies many are not publiclly traded. I am not an expert on the field. But Onasis was the worlds richest man, he made his money in shipping.

DRYS, TBSI, SB etc.. IMHO are not shipping companies, but momentum stocks that investment companies use to make money by listing them, promoting the story and selling option contracts. Take a look at all the sold expired worthless Options on TBSI and DRYS as they are run up and down. 

Look at all those high priced options that are now expired WORTHLESS. Some people/funds took some major losses. 

http://finance.yahoo.com/q/op?s=DRYS 

http://finance.yahoo.com/q/op?s=TBSI 

You have to remember TBSI & DRYS was single stock 2 years ago.

If you are patient and want to be a top fool Underperform all of them. Once the story wears thin (now?) the hedge funds will unload them.

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#4) On June 22, 2008 at 9:28 AM, chk999 (99.97) wrote:

Nice writeup on DRYS.  I'm going to hold that underperform call untill it is profitable. Heck, the sun doesn't burn out for billions of years, I got time.

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#5) On June 26, 2008 at 6:43 PM, RookToKing7 (< 20) wrote:

Only on Motley Fool can you find such articles with minimal research. No wonder I cancelled my paid membership. If you think any brother/sister combo can go to banks and buy 4 billion dollars worth of ships without showing any comptence and then buy an Oil drilling commpany for another 4 billion dollars borrowed from banks and investment houses they there is that Bridge in Brooklyn you must buy. This industry is here to stay do some research on how much Iron  Ore, Coal, Grain and Fertilizer need to be shipped around the globe and it s 10 year growth if you really want to learn about the Dry bulk industry and DRYS which is now a diversified play in two high growth industries which are Dry Bulk Shipping and Ultra Deep Sea Drilling for Oil ( hope you guys have heard of RIG another driller). Just go to the Dryships website and check out their presentation. They will earn 18 dollars a share this year and the PE is now 4 and not 7.

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#6) On June 27, 2008 at 6:33 AM, wax (97.09) wrote:

RooktoKing7;

I'll tell you what. I will apolgize for my minimal research if you can tell me what the basis was for the little bit of research you think I did. Just tell me just that much.

Then while you are at it, would you please tell everyone else what your last CAPS pick was? Or perhaps you would like to share your in-depth analysis about DryShips with the rest of us?

The bottom line is, you are clueless. You pitch your money into something without the faintest idea of why you are doing so, hope for the best, and bash anyone that has a differing opinion.

As to the rest of your post, the industry may be here to stay, it may rain tomorrow, the company may earn $18 a share, it may grow earnings at 100% growth rate...it may it may it may.

But if you believe everything you read at a company website and then make an investment decision based on that information you are not investor, you are a gambler. And eventually the dice will not roll in your favor.

Wax

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#7) On June 27, 2008 at 6:46 AM, DarthCheney (< 20) wrote:

wow, someone paid you for this garbage "analysis"? way to list the cash conversion cycle and acid test ratio, highly insightful. hahaha. you clearly have no idea about DRYS business. luckily, wall street is full of such trite and incompetent work.

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#8) On June 27, 2008 at 7:04 AM, wax (97.09) wrote:

Darth;

I fail to understand why you come to Fooldom or to CAPS.

The idea here is investors helping other investors. Yet you, just like the cat that posted before you, have failed to make a single CAPS pick, just as you have not provided a single piece of support for your DryShips position.

All you have done is remove your finger from your nose long enough to tell me my analysis was garbage. How is it garbage? Do you honestly think I made all of this up sitting on the can?

I'm glad you like DryShips as an investment. Now perhaps you can share with us, why? You are able to do that...right?

Wax 

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#9) On June 27, 2008 at 7:24 PM, Tastylunch (29.19) wrote:

Wow Wax looks like you are getting attacked by Dryships goons. I thought that only happened for OTC stocks.

for what it's worth I liked and appreciated the analysis. DRYS seems a little  shady to me as does SafeBulkers (SB)....

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#10) On June 28, 2008 at 8:28 AM, wax (97.09) wrote:

Thanx Tasty...most of the time folks that post stuff like that are pretty much clueless.

I used to call them ice house posters, folks that sit around a pub drinking beer and talking about a stock that old so and so told them about.  Next day they buy it. Two months later they've lost their rear ends and have sold the stock that was gonna be their ticket to easy street.

But at the tavern they're telling everyone how much money they made and buying folks beer with the money they saved by not eating lunch all week.

Wax 

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#11) On July 03, 2008 at 3:12 PM, beegdawg007 (< 20) wrote:

 Not to nit pick, but I think a couple of points should be brougth to light.... FYI, at the moment I do not own DRYS, so I do not take issue with your assertion that one should not own this "right now".   However, the driving fundamentals here make a very powerful value argument in favor of DRYS.

>>>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.>>>

 I don't know where you got the idea that these spot market voyages are that short period, but they aren't.  First off, it takes two to three days to load and offload a 70,000 ton Panamax class ship.  To put 70,000 tons into perspective, that is the equivalent of 6 - trains - each comprised of 110 cars of coal or grain.  

 Also, these ships only make about 12 knots/hr on average which is roughly 300 naut. miles per day.   So for a very short trip .... say U.S. east coast to northern Europe, the transport time 1 way would be 12-14 days not counting the load and offload time.  The spot market for ships in this class is seldom less than 1 month.   And, for Cape class charters which are typically in excess of 12,000 naut. miles., the spot charters are typicall longer than 2 months.  In addition, time charters often last more than several years.   DRYS has several future capes chartered for 10 year time periods and a few of the panamax's were recently let for four years.. (see recent announcement).  The key point here isthat the business is not really all that much of a day-to-day thing at all.  The revenue and income stream is actually quite predictable. 

 Also a comment about book value.  Book value and real market value for DRYS are very far apart.   Right now dry bulk ships are selling for about $1300/ton of capacity.   i.e. a newer Panamax vessle which is capable of carrying 75,000 tons is fetching about $100K/day on the resale market.   DRYS's fleet has a capacity of about 3.5 M tons.  So the market value for the fleet is close to $4.6 b.  Add to that the another $1.2 billion for the two deep water rigs and the assets are really worth something close to $4.8 B.   The total debt minus cash is about $700M.    So, the acual market value for the company is around $4B.   That translates to a real market value of about $95/share - with zero being added in for the value of soft assets like long term charters and management. 

 Drys will earn between $6.0 and $7.00 for Q2 and roughly the same for Q3 and roughly $20/share for the year.   The profit margin is in excess of 70%.  That's huge...

 In addition, DRYS now has over 50% of its fleet on long term charters.  In addition, both the drill rigs are leased for three year periods with renewal options for another 2 years.   The average that these rigs are renting for is now $600,000/day.

 My point, is that there is real substantial value here!!

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#12) On July 07, 2008 at 5:22 AM, wax (97.09) wrote:

begdawg;

 In my defense, I said:

"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)."

At the end of the day, you like the company, you believe it will have earnings of $6 or so, and it sounds like you think highly of company management. By all means, when you are able, please buy shares.

Wax

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#13) On July 07, 2008 at 10:49 PM, beegdawg007 (< 20) wrote:

>>>At the end of the day, you like the company, you believe it will have earnings of $6 or so<<<</p>

 There is virtually no question that DRYS will .... well actually, already has .. made at least $6.00 for Q2.  $1.50 of that is from the gain on sale of a ship which was sold the last week of last quarter.   That was announced with last quarter earnings.    And, as all who follow this market know, Dry Bulk rates were significantly higher during Q2 than during Q1.  That fact is readily available simply by looking at the charts of the BDI, ets.  Last quarter DRYS earned $4.61 a share during a period when charter rates were much much lower. 

 The reason that I do not own DRYS right now is that it is being actively traded byhedge funds that can move this small cap stock up or down as they wish.   That's reality.  DRYS will earn close to $20/share this year, but the fundamentals seem not to matter at all anymore.  So, until the charts agains say buy, I am out of the market on this stock as I am on most others small cap stocks.   This is just not a market which is trading on fundamentals. 

I'm curious, what do you believe earnings will be for the quarter and for the year?   And, again, I am not trying to convince anyone to buy DRYS right now.  I honestly do not own one share of the stock at this moment in time, so I don't care if it goes up or down.  It I trade it all, it would be just an in and out day trade.

 

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#14) On July 08, 2008 at 9:34 PM, wax (97.09) wrote:

Beedawg;

Please don't misunderstand my comment. I'm saying if you like the company then whenever the time is right for you to do so, I hope you are able to buy shares.

As to what I believe earnings will be, that's easy, I don't have a clue. Not only do I not have a clue, I don't care. When I buy a stock it's not because of what earnings might be, it's because of what earnings have actually been.

Wax 

 

 

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#15) On July 10, 2008 at 7:47 PM, beegdawg007 (< 20) wrote:

You look at yesterday's earnings to make investment decisions????  O.K.!!  Well, in the case of DRYS the TTM is $16.03 a share, so I'd think you'd be head over heals in love with the stock.   

http://finance.yahoo.com/q?s=drys

Not to be critical, but IMHO looking at yesterday's earnings to make decissions about stocks is like driving while looking only in the rear view mirror.  In my experience, the very best investment decisions are made by seeing a change before the market does.  Coal is a recent good example of this.  I doubled and tripled my recent investments in coal, because I could see that based on the upward pricing of coal that was in progress the coal stocks were dramatically undervalued.   As I look forward, I also see for example, that GE is dramatically undervalued.   The stock is now trading at about 10 times next years earnings. GE has never been that cheap.  The yield is high, the Book Value is the lowest its been in ten years, and GE currently has the largest backlog of orders it has ever had.. etc..  And, wouldn't looking at yesterday's earnings have reallye cooked your goose during the last 18 months with the mortgage companies and banks???  I think an investor who is really prepared looks both backward and forward.   But that is just mho. 

However, in the case of DRYS, both yesterday's earnings and tomorrow's earnings scream buy.  But right now, I'm chewing on a few other bones, so I still do not own any DRYS, even though it is trading at a "trailing PE" of less than 5 and a forward PE of less than 4!! 

 But, I don't mean to be contentious, so good luck with your investment style.  Just to demonstrate my good intentions, since you really like trailing earnings as an investment guied, here is a gift stock which I genuinely think is now a steal!  IRE has a trailing PE of less than 3 and it is trading at .75 times book value.   As you probably know, for banks, the BV is extremely relevant since it is comprised mostly of income producing portfolio.   Oh yeah, the "trailing" yield is over 16%!!! 

Regards,

b d:?D 

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