DryShips shares are down 30% in 2014 even though the company reported strong revenue growth in the first quarter.
Looking ahead, investors should avoid DryShips as the company has been consistently missing earnings estimates.
DryShips is facing a number of operational difficulties and the company's weak financial position means that its business is under threat.
Shares of DryShips (NASDAQ:DRYS) have taken a huge hammering this year. The stock is down a massive 30%, despite reporting strong revenue growth in the first quarter. Hence, the company was unable to execute a turnaround as its shares fell almost 4% after results. DryShips missed earnings estimates once again, as it reported an adjusted loss of $0.04 per share, excluding one-time items associated with the tender and refinancing of Ocean Rig's 9.5% senior unsecured notes due 2016, while analysts were expecting it to break-even.
The company has missed earnings estimates in each of the last four quarters by huge margins. Looking ahead, I think that DryShips should continue declining as it is facing a number of challenges in the business.
The future isn't too rosy
Stiff market conditions could lead to a bad performance going forward due to challenges in shipping operations. According to management, the Suezmax and the Aframax fleets should continue their weak performance going forward. The order book for these two fleets, as a percentage of the fleet, has been declining since the end of 2008.
Looking ahead, the picture doesn't look too bright either. Management expects the Suezmax fleet to grow by 5.8% and 2.6% in 2014 and 2015, respectively, below the 10-year average fleet growth of approximately 6.1%. The Aframax fleet, on the other hand, is expected to grow by just 1% and 1.8% in 2014 and 2015, respectively, as compared to the 10-year average fleet growth of approximately 5.1%. As DryShips has seen oversupply in the shipping industry, it is being forced to cut down on these growth rates.
DryShips' growth can be hurt further by the fact that its four Ice Class Panamax bulkers under construction at Jiangsu, Rongsheng Heavy Industries in China, have been severely delayed. DryShips' management is unable to confirm whether or not the steel cutting for these vessels has commenced, and contractual delivery dates are pretty close.
Management goes on further to state that the situation at the shipyard is deteriorating day by day, and the financial troubles are taking a toll on the construction and quality of the vessels built at Rongsheng. If DryShips ultimately cancels its contract here, then its fleet would be weak and the company may lose out on business opportunities going forward.
Moving on, DryShips is also facing financial crunches. The company has a weak cash position of just $887 million, while its total debt is pretty huge at $5.98 billion. In addition, the company's levered free cash flow over the last twelve months is also negative at a huge $963 million. Also, the current ratio is quite weak at just 0.55, which means that the company will have trouble meeting its short-term obligations.
DryShips has taken on more debt in the last one year. At the end of 2012, its total debt was $4.38 billion. This has increased significantly as we saw above. An increase in debt will lead to an increase in interest expenses that will cut into the company's profitability and cash position.
Even analysts at TheStreet are wary of DryShips' financial woes. Although TheStreet's ratings team has a "hold" rating for DryShips, they point out the company's balance sheet mismanagement in the following words--
We rate DRYSHIPS INC a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and growth in earnings per share. However, as a counter to these strengths, we find that the company has favored debt over equity in the management of its balance sheet.
DryShips' earnings have declined at a CAGR of almost 50% in the last five years. This shows the state of disarray the company is in. Given the company's financial and operational troubles, it won't make much sense to bet on DryShips going into its earnings, as the company has a habit of disappointing and its fundamentals are weak.
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.