DryShips: A Hidden Gem

Dec. 6.10 | About: DryShips Inc. (DRYS)

Dryships (NASDAQ:DRYS) 3rd quarter earnings:

Consensus: $0.25 a share on revenue of $216.92 million

3rd Quarter Profit was $49 million, or 0.18 a share, up from $31.4 million, or 0.11 a share, a year ago. On an adjusted basis, the company earned 0.38 a share. Revenue was $225.5 million, up from $222.2 million.

Therefore, DRYS beat on earnings and revenue.

But more importantly, the deepwater drilling segment may have just started to pay off. On November 11th, it reported signing its second order. More may be on the way. As oil becomes less abundant on land, oil majors are turning to deepwater oil fields. Petrobras (NYSE:PBR) found a massive deepwater oil field off the coast of Brazil a few years ago. To drill in deepwater takes special ships and equipment to do. And the ships take a very long time to build. Therefore, Dryship’s deepwater drilling segment has an advantage. As demand grows, more contracts should come.

Dryships has proposed spinning off its drill unit for a long time. It has already proposed a $500 private offering. But when its public offering does happen, Dryships’ shareholders should get these spin-off shares on the cheap. At about $5.86 a share, how much is the drill unit worth? The first contract was $160 million. The second contract was $77 million. So that is $237 million there. From the private offering last Friday, a 20% stake in the drill unit is estimated at $500 million. So 100% of the drill unit is supposedly worth $2.5 billion. That is well over the company’s market cap of $1.82 billion. From this, clearly the shares are undervalued.

But Dryships still has its main business, shipping everything from coal to grain to iron ore. As the global economy expands, shipping of dry bulk materials will become more in demand. One of the main reasons the stock fell from $150 a share to $1 a share was because the Baltic Dry Index plunged 96%. Though the stock has recovered some, it still has more to run. And most of the company’s ships are now on a long term contract which makes the stock less vulnerable to fluctuations in the Baltic Dry Index. Thus, shipping rates are mainly fixed for the near future. The main business has to be worth more than $0. Just the ships have value.

A forward P/E of 5 and a price to book of 0.55 (according to Yahoo Finance) tells me that the shares are still cheap. Plus, the market cap is about one-third of the enterprise value. Thus, theoretically, the company is selling for one-third of its value.

Disclosure: I am Long DRYS.