Aided by strong performance from its offshore drilling segment, Dryships Inc. (DRYS) reported that revenues in the September quarter jumped 41% year-over-year and operating income rose 3.2% over the same period. However, EPS dropped off to 16c (versus 15c analyst estimates) from 41c in the year-ago quarter even after taking out non-recurring items, mainly due to higher interest rate costs and a monstrous increase in the number of shares outstanding.
DRYS' drilling segment now accounts for 71% of its revenues and an estimated 64% of its net income (based on our calculations). The oil tanker segment accounts for 2% of revenues, with the drybulk segment making up only the remaining 27% of company revenues. This makes DRYS more of an “oil rig play with some drybulk assets” than a “drybulk shipper with some oil rig assets.” Furthermore, even the drybulk segment of the company is not as dependent on the spot market as it was before. In that sense, it is a very different company today. However, with a CEO, George Economou, who is not exactly very receptive to shareholder concerns, and a 98% price drop from the $131 high in 2007 while shares outstanding ballooned from 35 million in 2007 to 356 million in the latest quarter report, it is difficult for this company to get any respect. Add to this the continuing concerns about Mr. Economou’s conflict of interest due to his 70% ownership of Greek shipping company Cardiff with which DRYS has contractual relationships, the company’s high debt, and the total collapse in vessel rates in the drybulk shipping industry, and it is easy to see why shares trade at near bankruptcy levels.
However, at 16c non-GAAP earnings in the latest reported September quarter, the company looks like a steal at Monday’s closing price of $2.72, depending on whether that level of earnings and growth can be sustained going forward. Its drilling segment reported revenues up for the quarter to $226 million from the year-ago level of $110 million, with a corresponding increase in operating and net income. The fundamentals of the drilling segment are positive going forward, and DRYS seems to be in a good position to capture that growth. The drybulk segment is currently plagued by vessel rates at historic lows mainly due to fierce price competition that resulted from an overbuilding of ships in the last cycle, and weakened further by the faltering global economy and concerns over Chinese iron ore imports. The shipping industry is cyclical, and at some point the vessel rates will rebound, either as China and the global economy pick up or over time as the demand works through the capacity added during the last cycle. Also, there is speculation that the Japanese rebuilding of its nuclear facilities and infrastructure following the devastating tsunami earlier this year may push up demand for drybulk shipping later this year or early in 2012.s of comparison to peers, DRYS trades at a forward 4-5 P/E, while its peers in both the drybulk and drilling industry trade at much higher P/Es. For example, its peers Diana Shipping Inc. (DSX) and Navios Maritime Partners (NMM) in the drybulk shipping industry trade at forward 10 and 11 P/Es respectively, while the average for the drybulk shippers is 11 (as detailed by us in a recent article on investments of leading fund managers in the shipping industry). Its peers in the offshore drilling industry, for example, Atwood Oceanics (ATW), Transocean Ltd. (RIG) and Diamond Offshore Drilling (DO) trade at even higher valuations at forward P/Es of 11, 10 and 13 respectively, while their growth rates are nowhere near as high as the drilling segment of DRYS.
In terms of Enterprise Value to EBITDA (EV/EBITDA), that is capital structure neutral and relevant when comparing companies with varying levels of debt leverage, DRYS traded at 8.9 before the September quarter report versus the 9.0 average for the drybulk shipping industry.
We believe that DRYS' current September quarter report that came out yesterday after the close of market offers a glimpse of the potential profits that can be realized by its various segments going forward, and it may be a good investment at current prices for the not-so-risk-averse long-term investor.
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