DryShips has a huge debt load that has increased remarkably from last year.
Although DryShips does have a few points in its favor, the uncertain shipping environment, low pricing, and high interest expense are concerns.
Low institutional ownership in DryShips shows that Wall Street doesn’t have much confidence in the stock.
It is difficult to determine whether DryShips (NASDAQ:DRYS) is a good investment or not. In the recent quarter, the company posted year-over-year revenue growth of 52.5%, but it continues to incur a loss. Moreover, DryShips is deep in debt, and the more concerning part is that the debt has continued to increase over time. There are certain positives that would enhance investors' confidence, including the fact that DryShips will execute a turnaround as per management, but overall, DryShips might not be a good investment. Let's see why.
Declining loss, but increasing debt
For the fourth quarter, DryShips posted a net loss of $24.4 million, or $0.06 per share. But investors can take heart from the fact that DryShips' bottom line improved from a net loss of $129.8 million, or $0.34 per share in the year-ago period.
While these improvements look promising, DryShips' financials aren't all that rosy. For example, it has $320 million worth of cash & cash equivalents but its debt load is a massive $5.6 billion. Moreover, the debt has ballooned significantly from last year's $4.24 billion. As a result, DryShips' debt-to-equity ratio has also increased to 0.59 from 0.52 last year.
A mix of positives and negatives
George Economou, the DryShips CEO, is quite optimistic about the prospects of the shipping market. After a period of oversupply in the industry, the recent volatility in the tanker and dry bulk sector is an indication that the industry is moving toward a balanced supply-demand picture. The increase in asset prices gives DryShips hope that its business will rebound, but a decline in shipping rates for cargo could hurt the dry bulk shipper.
But even then, management believes that the company has enough factors that will help it make a comeback. DryShips currently has about 3,600 spot days in 2014 and 3,600 spot days in 2015 for its crude tanker fleet. On the other hand, it has about 9,000 spot days in 2014 and 11,900 spot days in 2015 for its dry bulk fleet. Hence, the company has a good number of spot days that would enable it to increase revenue, but since a large number of its tankers and bulk carriers are operating just above operating cost levels, DryShips' bottom line performance could be weak.
Also, there are indications that both shippers and charterers are looking forward to a strong rebound this year. However, the Baltic Dry Index has fallen of late. But analysts are of the view that the Baltic Dry Index will range between 1,400 and 1,600 points this year, which will be a good improvement over 1,060 points last year.
Urbanization moves in China are expected to lead to an increase in demand for steel and coal, while the upcoming grain harvesting season could also lead to an improvement in shipping rates. Iron ore exports from Brazil and Australia are slated to increase also. As such, dry bulk rates are expected to bounce back as chartering activity increases.
According to The Street DryShips is a "Hold" as a result of a mix of strengths and weaknesses. DryShips is strong in a few areas, such as its revenue growth. But, there are few weaknesses as well, such as a weak bottom line, increasing debt, and a disappointing return on equity, according to The Street.
Moreover, DryShips' profit margin is a disastrous 15% and the company's levered free cash flow is a negative $962 million. The substantial increase in debt over last year is leading to higher interest expenses, and ultimately negating the effect of revenue growth. Moreover, DryShips has very low institutional and insider ownership. Its institutional ownership is 19% of the float. In comparison, industry peer Frontline's (NYSE:FRO) institutional ownership is better at almost 30%. This suggests that institutional investors don't have much faith in DryShips.
DryShips is already down 24% this year, and while there are reasons to be positive about it, there are many reasons to be negative as well. The high debt and the accompanying interest expense, along with overall uncertainty in the dry bulk shipping industry, are some strong reasons why DryShips doesn't look like a good investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.