Earnings Preview: DryShips

| About: DryShips Inc. (DRYS)

Company Profile

According to the DryShips (NASDAQ:DRYS) website:

The company is an owner of drybulk carriers and tankers that operate worldwide. Through its majority owned subsidiary, Ocean Rig UDW Inc., DryShips owns and operates nine offshore ultra deepwater drilling units, comprised of two ultra deepwater semisubmersible drilling rigs and seven ultra deepwater drillships, three of which remain to be delivered to Ocean Rig during 2013.

DryShips owns a fleet of 47 drybulk carriers (including newbuildings), comprising 11 Capesize, 29 Panamax, two Supramax and five Very Large Ore Carriers (VLOC) with a combined deadweight tonnage of about 5.2 million tons, and 12 tankers (including newbuildings), comprising six Suezmax and six Aframax, with a combined deadweight tonnage of over 1.6 million tons.

DryShips is scheduled to report earnings on May 29 after the market closes, and will hold a conference call the following day.

Earnings Preview

The consensus analyst estimate is for DryShips to report earnings of $-0.01/share, falling midway between the low end of the range ($-0.16) and the high end ($0.16). The mean estimate for revenue comes in at $275.73 million between estimates for revenues as low as $225 million and as high as $357 million. The estimated earnings number if attained would represent year-over-year earnings decline of 106.7% while the revenue growth, if coming in at consensus estimates, would represent growth of 32.9% from the same quarter a year ago. Earnings and revenue estimates are derived from the nine analysts covering the stock (three analysts provide revenue estimates).

Consensus Earnings Estimates Trend

Consensus estimates for earnings have steadily declined over the quarter, with initial estimates three months ago coming in at $0.15/share. Two months ago, expectations were for $0.12, $0.10 one month ago and $0.04 as early as a week ago. Such deterioration should signify to investors that first-quarter results may come in even lower than current estimates.

Current Analyst Price Targets

To this point there has only been one significant event related to analysts covering the stock, and that is Global Hunter Securities initiating coverage on the stock with a buy rating. Analysts at the firm have set a price target for the stock at $6/share, a significant premium to the current share price.

Ratio Analysis

To get a sense of the current valuation with respect to its competitors, below is the ratio analysis for DryShips vs. Diana Shipping (NYSE:DSX) and Navios Maritime Partners (NYSE:NMM), along with the industry and S&P 500 averages.

DRYS DSX NMM Industry S&P 500
Price / Earnings (Forward) 8.14 25.83 12.54 --- 15.3
PEG 0.63 --- 1.65 --- ---
Price / Sales 0.90 2.49 4.04 1.3 1.3
Price / Book 0.31 0.53 1.26 0.9 2.2
Dividend Yield ---% ---% 13.76% 4.6% 2.1%
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Other competitors in the bulk shippers industry include Safe Bulkers (NYSE:SB), FreeSeas (FREE), and Paragon Shipping (PRGN)

Fair Value Analysis

The valuation of discounted cash flows is an effective tool in identifying the intrinsic value for well-established companies. The input for the analysis is as follows:

Revenue Growth Rate (Current Year / Ongoing) 13% / 4%
Cost of Goods Sold (COGS)(% of Revenue) 22.1%
Operating Expenses (% of Revenue) 48.4%
Tax Rate 15% / 20%
Weighted Average Cost of Capital 9%
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Analyst expectations are for DryShips to grow revenues over the next five years at a rate of 13% while the industry as a whole grows at 4%. To preserve the conservative nature of the analysis, initially the allowance will be for revenues to grow at the 13% rate. That rate will then be dampened to the industry average by the end of 2015. Furthermore, operating expenses for the company have been highly variable over the past year. As a result, the fair value analysis will use the two-year average with an additional 200 basis points tacked on, resulting in an operating expenses projection of 48.4% of revenues.

Since the company's tax rate has also been highly variable, the 2011 tax rate of 15% will be held through 2012 and then gradually increased to 20% by 2015. Finally, the weighted average cost of capital for the industry will be used to discount all future cash flows. The result is an approximate fair value of $2.21 per share. Given the current valuation of 2.20/share, the stock seems fairly valued in the market.

Fundamental data was obtained from Finviz, TDAmeritrade, and Morningstar.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.