I fell for it at first too. DryShips (NASDAQ:DRYS) the company and the stock have a majority stake in public company Ocean Rig UDW (NASDAQ:ORIG) so it reports both results mixed as if the two were one company. Ocean Rig UDW's current financials and future outlook are both highly profitable while DryShips, the stand-alone company, is losing money hand over fist. DryShips shareholders only profit from the Ocean Rig stake as it pays dividends back to DryShips or as DryShips sells shares of Ocean Rig stock. The actual earnings results, however, have no direct effect other than to mask the poor performance of the operating business that is DryShips.
Don't take my word for it. CEO of both companies, George Economou, stated this in the last Dryships conference call (my emphasis added):
"I would like to clarify for everyone, once again, that DryShips is a pure shipping company with predominantly spot charter market exposure in 2014 and beyond and a majority stake in Ocean Rig, which operates as the deepwater drillships."
As such, when you see writers refer to the great second quarter DryShips had and its great outlook in terms of earnings -- tread carefully.
For example, one Seeking Alpha writer wrote,
"DryShips looks well-positioned going forward. In addition, it has a low forward P/E of only 9, which makes the stock too cheap to ignore."
His article was actually well written and his analysis made logical sense. The only problem is DryShips successfully tricked him, whether that trickery was deliberate or not, by reporting its Ocean Rig stake mixed in with the "pure shipping company" operations and caused him to conclude it looks cheap especially based on analyst estimates.
If you back out the Ocean Rig portion of estimates the actual estimate for the DryShips shipping company is for more quite sizeable net losses in the $100 million range. The forward P/E of 9 is an illusion. Even if you insisted on using the separate entity known as Ocean Rig in the mixed operations for some weird generous reason, the GAAP accounting rules are strange. DryShips doesn't own the entire Ocean Rig company. It owns a little more than half. Yet GAAP accounting rules requires it to report Ocean Rig's earnings as if DryShips owned the entire company and gets 100% of the benefits. Obviously that's not even close to true as it is a separate public entity for which over $1 billion of its market cap is owned by others and not DryShips.
But DryShips realizes 100% of the benefit from Ocean Rig's earnings in terms of earnings reporting. It is tricking (again, deliberately or not) large numbers of investors into thinking the earnings from Ocean Rig, mixed in, for which DryShips isn't even entitled to are real earnings and analyst estimates to base a value for DryShips the stock.
To be fair to DryShips, it is only reporting what it is required to. To be fair to shareholders, DryShips, I believe has an ethical obligation to report the details separately of the shipping company since the executives must know the combined entities are pumping up a false and misleading earnings picture. This is true even if you were to use the most generous of methods by insisting on including a prorated portion of Ocean Rig's earnings based on the actual ownership percentage that DryShips has.
Think of it like this. Let's say you and I went into business together and owned a successful mini chain of restaurants called "The Plate Specials" pulling in $1 million per year in profit. My take is therefore $500,000 per year. Now imagine I personally also owned a restaurant called "The Specialist" that was losing $400,000 per year.
In this example, my net take home pay is a $500,000 gain offset by a $400,000 loss for a $100,000 profit. In this scenario, what DryShips is doing, is taking the entire partnership stake and reporting it as if it were 100% of its own. That would be like me instead of reporting a $100,000 per year profit I included the entire $1 million I share with you as my partner so now I'm proud to report I make $600,000 per year instead of $100,000. I get GAAP accounting blessing and suddenly financial writers are claiming others should invest in money-losing "The Specialist" restaurant believing under the false belief that it is highly profitable based on an illusionary $600,000 income that makes this restaurant "just too cheap to ignore."
The problem is the numbers DryShips report are pure fantasy just like in my make-believe scenario. It reports profit for which is in reality shared by others and investors are falling for it. Don't.
My advice? If you really like figures that have been coming and are estimated to come as a result of Ocean Rig, consider buying that company stock instead, and don't fall for the DryShips earnings game. As an owner of Ocean Rig, you are entitled to all of the actual earnings per share instead of some number that satisfies a strange accounting rule but isn't really true. DryShips trades "cheap" for a reason.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.