The recovery of the dry bulk shipping sector appears to be well underway. As seen in the chart below, shipping rates continue to rise following several years of bottomed-out rates. Over the course of this period the market witnessed the fall of numerous shipping companies. Despite having been beaten down, DryShips (DRYS) continues to be a leading name in this sector. Yet the company remains an opportunity shrouded with a bitter taste.
Dryships now trades with a $1.34 billion market capitalization as of October 9, 2013. The company carries a very low price-to-book ratio of 0.51 and a price-to-sales ratio of 1.07. While undervalued in terms of book value, the company also carries a very low current ratio of 0.54 while carrying total liabilities of $5.02 billion. The limited liquidity and poor market conditions have played a significant factor in its current valuation. The following are four reasons to buy DryShips and four reasons to stay away from the company.
4 Reasons To Invest In DryShips
- Diversified Fleet. Through its own fleet and through its partially owned subsidiary, DryShips provides investors exposure to dry bulk shipping and deepwater drilling. Within its shipping fleet, the company supports a wide variety of ships including Capesize, Panamax, Supramax, Very Large Ore Carriers, Suezmax, and Aframax classes.
- Modern Fleet. The current drybulk segment supports a modern fleet with an average age of 7.43 years. The company's tanker segment is brand new as the newbuild program was completed in January 2013.
- Spot Market Exposure. Dryships has 45% of its fleet under charter coverage in 2013. Much of the company's charters expire in late 2013 and early 2014. This appears to be well timed with the current recovery now underway, giving the company upside potential as spot market rates rise.
- Undervalued. Dryships owns approximately 59% of Ocean Rig (ORIG), a publicly traded company now supporting a market capitalization of $2.44 billion as of October 9. DryShips now carries a market capitalization of $1.34 billion, nearly $100 million shy of its majority position in ORIG. Even before considering the company's shipping segment, it therefore remains evident that DRYS trades at a steep discount to its book value.
4 Reasons to Stay Away From DryShips
- Heavy debt load. As of the end of June, Dryships carried total debt and other liabilities of $5.02 billion. While the maturities of most of these debt facilities have been extended out to 2015 and beyond, the company continues to carry a heavy burden. The extent of this pressure can be seen by the fact that the company continues to raise equity and by the fact that it continues to pledge part of its ownership in ORIG to lending creditors.
- Poor management decisions. Management has often been criticized for its lack of prudence when it comes to managing risk. One noteworthy example of taking on too much risk can be seen when the company actually paid a buyer to take two unfinished ships off of its hands.
- Ongoing dilution. Management continues to brutally tap the equity markets in order to stay afloat without sacrificing additional assets. Yet such a burden has hit shareholders hard. As of December 31, 2007 there were 36.7 million shares outstanding. Prior to its latest equity raise, the company has grown this count to 403.8 million shares outstanding. On October 4, DryShips announced the launching of an ATM equity raise covering up to $200 million of common shares.
- Possible conflicts of interest. CEO George Economou has been the subject of raised concerns in the past due to possible conflicts of interest. The officer carries significant stakes in both DryShips and private company, Cardiff Marine. In 2008, the company very openly purchased and then subsequently cancelled the orders of several ships between the two companies. Yet this was not before enduring accompanying write-offs as a result.
DryShips inevitably remains one of the most perplexing companies in the present. On the one hand, the company trades significantly below its book value and has even normalized at these trading levels for multiple years. Distaste for management's decisions and the burdensome debt load have significantly harmed the company's stock. With its latest $200 million dilutive effort, DryShips continues to secure its ability to thrive in the future as the shipping recovery unfolds. Yet at the same time, the company clearly does so at the peril of ostracizing the support of its shareholder base.
DRYS data by YCharts
Nevertheless, DryShips also commands a leading position when it comes to exploiting a rise in shipping rates. For some time, the company has leveraged its majority position in Ocean Rig. This has allowed the company to commit a high portion of its shipping fleet to spot market exposure. With the shipping rate recovery now seemingly underway, it remains yet to be seen if the market will respect DryShips with a higher multiple. Yet armed with a lucrative drilling fleet and a young shipping fleet, the company retains an impressive portfolio of assets that is likely to look much better once the industry stabilizes.
Disclosure: I am long DRYS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.