With the dry bulk sector still in the dumps because of overcapacity and worries about demand, DryShips (DRYS) has struggled. However, it seems like investors are overly pessimistic about the stock; all of the key valuation metrics suggest that the stock is undervalued.
Valuation: Two of DryShips' trailing 5 year valuation metrics suggest that the stock is fairly valued, while the other one suggests overvaluation relative to their respective 5 year averages. DryShips' current P/B ratio is 0.4, and it has averaged 1.1 over the past 5 years with a high of 4.6 and low of 0.2. DryShips' current P/S ratio is 1.3, and it has averaged 2.4 over the past 5 years, with a high of 7.2 and low of 0.7. DryShips' current P/E ratio is 28.9 and it has averaged 8 over the past 5 years, with a high of 23.4, and a low of 1.7. Note, however, that the trailing P/E ratio may be a bit misleading here because of the fact that DryShips is in a cyclical industry. Therefore, the P/B and P/S ratio are a lot more relevant here, and suggest that the stock is very undervalued.
Price Target: The consensus price target for the analysts who follow DryShips is $4.40. That is upside of 46% from the current stock price of $3, and suggests that the stock is undervalued at these levels. This also suggests that the stock has significant upside and is an attractive opportunity at these levels.
Forward Valuation: DryShips is currently trading at about $3 a share, with analysts expecting EPS of $0.50 next year, an earnings increase of 22% y/y, for a forward P/E ratio of 6. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. One of the few dry bulk shipping companies that is expected to be profitable next year is Diana Shipping (DSX). The stock is currently trading at about $9 a share, with analysts expecting EPS of $0.76 next year, an earnings decline of -42% y/y, for a forward P/E ratio of 11.7. Based on Diana Shipping, DryShips is way undervalued.
Earnings Estimates: DryShips has beat EPS estimates 1 time in the past 4 quarters. The company's EPS figures have come in between -13 cents and 2 cents from consensus estimates or about -76.5% to 14.3% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin, which suggests that the stock may experience upside from earnings surprises.
Top Stock Holders: The top two funds that own DryShips are Rydex|SGI Mid Cap Value A, which owns 2.9 million shares or 0.7% of the shares outstanding and Rydex|SGI Mid Cap Value Inst, which owns 1.2 million shares or 0.28% of the shares outstanding. The top two institutions that own DryShips are Deutsche Bank AG, which owns 27.1 million shares or 6.61% of the shares outstanding, and Guggenheim Capital Llc, which owns 6.6 million shares or 1.61% of the shares outstanding.
Price Action: DryShips is down 38.1% over the past year, underperforming the S&P 500, which is up 3.7%. Looking at the technicals, the stock is currently above its 50 day moving average, which sits at $2.31 and above its 200 day moving average, which sits at $2.6.
Conclusion: DryShips is worth a shot here, despite the recent run up of 36% to $3 a share. There are definite worries about the stock because of overcapacity in the sector and DryShips' leverage, however, the valuation metrics suggest that the stock is way undervalued, and I agree. The most telling metric is the trailing P/B ratio, and it makes sense that it is below 1, as a number of dry bulk companies have been trading for below their ship value. DryShips also is more diversified than the other dry bulkers, because of its investment in offshore driller Ocean Rig UDW (ORIG) that should provide some support. Note, it may be worthwhile to be a little patient with the stock here after its recent run up; it is probably due for some sort of pullback which may create a better entry point.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.