DRYS: Shipper of the Global Commodities Boom 26 comments
February 25, 2008
| about: DRYS
Option Dragon
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Well, after announcing blockbuster earnings with Q4 EPS of $5.37 vs.
consensus of $4.07 and Q4 revenues of $233.379M vs. consensus of
$208.75M, DRYS is now #1 on the IBD list and for good reason. DryShips (DRYS) is a
global leader and is based in Greece, the global shipping leader.
They own and operate drybulk carriers worldwide carrying every type of booming dry commodity you can think of. They run the transport cells to the global economic body.
They deliver coal (booming), iron ore (booming), grains (booming), baxite, phosphatee (booming), fertilizers (booming), and steel products (booming). DRYS stock price seems correlated to the moves of the Baltic Dry Index (BDI). The Street.com has a very good look into DRYS and what they do. DRYS has a very nice P/E ratio of 6.57 with a forward of 6.14. Quarterly revenue growth of 195% and quarterly earnings growth of 443.5% (um does someone see some sort of discrepency here?). I love, love their float at 24 million shares for the world to trade and they do trade this puppy with an average volume of almost 6 million shares a day.
Short interest is at over 3 million shares or over 12.5% of the float. The year highs were at $131.34 with recent lows at $50. Analysts are bullish as well. Here are their comments:
On Feb. 19th, Jefferies reiterated their Buy rating following the upside to Q4 results and saidd they believe dry bulk spot charter rates are likely to remain strong throughout 2008 and finds shares attractively valued at current levels. Target remains $160.
On Feb. 15th Cantor reiterated their BUy rating with a $121 price target saying they believe the company continues to benefit from a sustained strong dry bulk market.
Now they do have some bears with Howe Robinson Shipbrokers on Feb. 7th saying that a global downturn would hit dry bulk shipping faster and harder than expected, also it is of note that the global steel industry accounts for half of dry bulk demand. MT and RIO recently raised iron ore prices do you think they raised due to softening demand? Nope, i don’t think so. I also believe that the worst case scenario has already been priced into the stock after dropping from $130 to $50 and the Dry Bulk Index dropping from its highs to the present.
On a technical note one can see an inverted head and shoulder formation since December. The double bottom head sits on $50 and the neck line is around $80. The length between the two is $30 and could indicate a short term target of over $110 off of the right shoulder break.
click to enlarge
They own and operate drybulk carriers worldwide carrying every type of booming dry commodity you can think of. They run the transport cells to the global economic body.
They deliver coal (booming), iron ore (booming), grains (booming), baxite, phosphatee (booming), fertilizers (booming), and steel products (booming). DRYS stock price seems correlated to the moves of the Baltic Dry Index (BDI). The Street.com has a very good look into DRYS and what they do. DRYS has a very nice P/E ratio of 6.57 with a forward of 6.14. Quarterly revenue growth of 195% and quarterly earnings growth of 443.5% (um does someone see some sort of discrepency here?). I love, love their float at 24 million shares for the world to trade and they do trade this puppy with an average volume of almost 6 million shares a day.
Short interest is at over 3 million shares or over 12.5% of the float. The year highs were at $131.34 with recent lows at $50. Analysts are bullish as well. Here are their comments:
On Feb. 19th, Jefferies reiterated their Buy rating following the upside to Q4 results and saidd they believe dry bulk spot charter rates are likely to remain strong throughout 2008 and finds shares attractively valued at current levels. Target remains $160.
On Feb. 15th Cantor reiterated their BUy rating with a $121 price target saying they believe the company continues to benefit from a sustained strong dry bulk market.
Now they do have some bears with Howe Robinson Shipbrokers on Feb. 7th saying that a global downturn would hit dry bulk shipping faster and harder than expected, also it is of note that the global steel industry accounts for half of dry bulk demand. MT and RIO recently raised iron ore prices do you think they raised due to softening demand? Nope, i don’t think so. I also believe that the worst case scenario has already been priced into the stock after dropping from $130 to $50 and the Dry Bulk Index dropping from its highs to the present.
On a technical note one can see an inverted head and shoulder formation since December. The double bottom head sits on $50 and the neck line is around $80. The length between the two is $30 and could indicate a short term target of over $110 off of the right shoulder break.
click to enlarge
Disclosure: Long DRYS
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This article has 26 comments:
W2B
W2B
He is out. How long it will take for the rates to adjust (if they have not already) should be capable of calculation, based on terms of expiration of current charters, and ratio of available spot to longer terms.
Analysts at capital Link shipping expect Panamax rates at 55K and Capesize at 105K for this year which is were they are at now, and well below the rates for Q4 experienced by the earnings in DRYS.
DRYS will be shorted a lot, because of BDI volatility and that huge Debt on the B/S which makes it very risky, its fleet is getting old also.
In the other hand DSX, has brand new ships, averaging less than 5 years old, only 100K in debt and long term charters which provide stable visibility along with an 8% dividend yield. 6 Capesize ships chartered for 5 years, with 2 Panamax at 2+years. 12 Panamax on short term in order to take advantage of strong BDI with only 2 of those ships with rates above the current BDI rates. It is a much conservative company, with a stronger Balance Sheet and high dividend, which is less likely to be shorted. Just look what is happening to DRYS today, and how DSX is stable.
Hopefully, the management will continue to run the company with the current strategy of low debts and long term contracts for new vessels acquired.
ESEA looks good except, that it manages a very old fleet, with good cash flow for now, but most likely to have ships scrapped within the next 5 years, decreasing the earnings, cash flow and dividends. Older ships will be harder to charter in the future because they are not fuel efficient for the companies taking on the time charters.
MANY of your assumptions are inaccurate. It is obvious to me you are a very very conservative investor and given that assumption, you should NOT be in DRYS anyway, it is too volatile and the beta will keep you up at night.
I on the other hand am willing to take the risk, absorb the high beta and I see things completely inverted to what you do in nearly every aspect.
I dont see debt as such a negative. If you had read the most recent 6-K you would have known that DRYS participates strongly in currency and rate swaps. The theory about interest rate risk is 100% incorrect. Even if the company were to only cover some of their debt, the load is not hurting cash flows for 2008.
The age of the fleet comment is completely inaccurate, DRYS has been updating their fleet, expanding the fleet while DSX is happy to play safe with a smaller fleet and a less than spot rate long term locks.
I am more than happy giving up an dividend in return for growth, it is the choice of management to either give cash flow and/or borrowed monies to lure investors, or lure investors with growth. I am not 60 years old and I am more than happy waiting on dividends and taking a risk with growth.
You fault George for expanding operations and taking calculated risks and you fault him for investing in Ocean Rig I on the other hand side with the intelligence and knowledge of the CEO, he is not a figure head with no industry experience. He knows this industry and is smarter than anyone who will reply to this message, I will side with the person who intelligently looks FORWARD and sees value in diversifying assets and lines of business, you seem to see otherwise.
Go ahead and stick with DSX, outside the debt issue I see zero comparison between the two. DRYS Margins are better, growth is better and I side with growth versus perceived stability. You applaud the charter announced, I laugh at it.
DRYS is not for a weak stomach, so you need to stick with a lower beta and higher yield company. I see strengths where you see weakness, I see promise where you see risk.
Good luck with the 8 percent dividend. I will take my returns in capital gains and skip the quarterly dividend.
DRYS will NEVER trade at market valuations similar to its competitors. A company of DRYS's size should be managing all of its operations internally. Instead, DRYS pays HEFTY fees (and commissions) to related companies owned by George to perform its functions. If you compare financial statements, you will see that DRYS's expenses are much higher than its competitors. And for the person that commented that DRYS is a cash cow earning $100K+ per day on ships that cost $7K per day to run, doesn't have a clue about the true economics of the business. $7K per day is DRYS's OPERATING COST, not its total cost. Do the math on a $105 million capesize ship - total cost is in the neighborhood of $33K per day. Of course, when you accumulate debt with the market at or near record highs, and don't take long term charter coverage against, you leave yourself extremely vulnerable to a market downturn. This is magnified for DRYS by the huge percentage of the float that trades on a daily basis!!! This stock is not for long term investors. Its become a vehicle for hedge funds to trade the spot BDI through equity markets. George doesn't care because he is milking HUGE fees off of DRYS to line his pockets.
And for the other commentor that mentioned the huge disconnect between revenue and profit growth in the 4th quarter, you need to be careful in separating out OPERATING income from gains on ASSET SALE INCOME. DRYS's "cheap" ships are being sold off in the name of 'fleet renewal' which also boosts income. They are being replaced with more expensive modern tonnage where the asset price is correlated to never before seen spot rates, but with little risk diversification in the charter coverage strategy. Of course, George loves the whole process because HE gets paid commissions to perform the basic functions that EVERY other company in the sector does for itself!
This stock is no different than a late 1990's internet startup.
If it smells fishy, there must be something rotting!
I will be honest and say that last year I read all the one-sided hate about George. There are a few firms who have it out for him and have painted a one sided portrait of his past.
Some take comments he makes and form a general opinion based on one liners and out of context quotes. Reading these slanted points of view stopped me from investing about 50 points earlier, then I revisited the stock and found more accurate and less biased accounts of what happened. You really should research more than one or two firms disdain for George, you might find out details which were MISSED by the people who dislike him.
Is George different? yes. Can he be combative and difficult? Yes he can. I look past the differences and see what I feel is a strong business sense and a history of understanding the industry and taking risks which could turn out to be very smart decisions.
The comparison between DRYS and an internet startup is completely laughable, you really are showing colors by making such a poor comparision. I was a stock broker during the internet boom, from the late 90's until a few years ago and I saw the internet stocks and the optic stocks and the similiarities are ZERO.
As for sorting the buy and sale of ships, that isnt so tough to do, spend 20 minutes and create a spread sheet, you make it out to be an impossible task and it really isnt.
Viewing OPERATION profits and costs is very easy, the 6-K has everything you need and I have no issue with the costs the company has for the vessels, nor the conflict of interests with Cardiff and DRYS. If you look ONLY at operational margins, DRYS is better than DSX and most all other Dry shippers that I follow.
I have read almost word for word the bashings you make about George and his comments about the US investor and market. I have the ability to discern his real opinions, even if he sprinkles some sarcasm and points of view from time to time and I am fully aware of the risks associated with investing in DRYS.
If you think there is risk that the Dry market goes under like the last time you reference, then please feel free to stop investing in ANY of the companies in the industry. I dont feel the negativity you do towards him or the company and am willing to take that risk and I have confidence in his experience and skills in the industry.
Your comment "George is a clown for bleeding the company's future for a stake in Ocean Rig" shows how little you know about business. George knows that the current rates are historically high and the there are a lot more ships headed to market in coming years. He knows the dry bulk business will be making less money a few years out. He is diversifying the company's assets into a business with a similar business model (the rental business) that is likely to have a strong earnings profile for many years to come.
Also, you say "There is no such thing as growth in earnings for 2008, 2007 was the peak year in rates..." Even if 2007 WAS the peak in rates it doesn't mean it will be the peak in earnings for Dryships. Even with the drop in the BDI, rates are currently much higher than than they were 12 months prior. Dryships will have a larger fleet (many more billed days) and Dryships put 35% of the fleet into long term charters back in October when rates had skyrocketed so that will be collected for the entire year. DRYS earnings WILL be higher in 2008 unless the DBI drops considerably from where it is today.
I've already done all the things that you suggest. I'M IN THE BUSINESS - I have been for almost 18 years.
If you've done any of the work that you suggest others do, and compare the metrics to the other publicly traded companies, you will find...
1) Dryships average daily operating costs are the highest in the industry.
2) Dryships wastes TENS OF MILLIONS of dollars paying fees and commissions to George's related companies that it should be doing for itself for a FRACTION OF THE COST. Again compare the fees, commissions and expenses in related party transactions to ANY other dry bulk company.
3) Read the original prospectus. Those of in the industry know George's past better than you. He issued debt and defaulted in less than 1 year WITHOUT any change in market conditions.
4) Oceanrig makes sense for George because he gets paid a huge commission AND gets to cash out on a BIG personal gain on his (CARDIFF's) investment in the two drill rigs on order, by transferring it into DRYS.
5) When DRYS churns its fleet, the vessel's are transfered through related parties first, not directly into DRYS. Again, costing DRYS additional $$ at shareholder expense, but at George's gain.
6) Cardiff has additional bulkers on order from shipyards in conflict with DRYS, but that conflict will be solved when George transfers the newbuilding contracts into DRYS at record high prices. AGAIN, lining his own pocket with personal profits by transferring all of the risk to public shareholders, while pocketing another round of hefty commissions.
George's fiduciary duty is lining his own pockets while transferring all risks to DRYS shareholders. DRYS concentrated exposure to the spot market leaves it vulnerable to major corrections when they happen (like January's events).
The rise and fall of DRYS over the next 12 to 18 months will mirror the internet boom. DRYS is buying assets at inflated spot prices, when replacement assets can be bought forward at HUGE discounts. That means huge depreciation adjustments (impairment charges) are coming down the road. The churn on the free float is evidence that most investors (including George who has been decreasing his interests) are not committed to this time bomb.
What I am suggesting is not going to happen overnight, but I do the detailed S & D analysis on the fleet and the basic materials sector. Live by the sword, die by the sword. DRYS lack of meaningful forward charter coverage will come back to haunt it down the road, with high cost assets that will have trouble competing with the THOUSANDS of new ships on order.
Bulls and Bears always eat, and pigs always get slaughtered. Don't let greed get in the way of sound decision making. The stock's Beta says it all. Returns are always risk adjusted. DRYS's performance to date has been the result of a HIGH risk strategy. Let's not forget, the same guy who thinks its smart to be exposed to SPOT also thought it was a good idea to forward cover the balance of 2006's charter coverage at levels that were so cheap, the market was on the verge of starting to clean out some of the older tonnage in the market.
Lets talk about these claims.
I dont doubt you are in the industry, no reason for me not to, but that actually makes me inclined to think you are even MORE slighted against George rather than if you werent in the industry. I know he has many enemies and many naysayers because of his bold approach and more aggressive strategy.
What I would like is for you to follow up the claims, specifically concerning operating expenses with ACTUAL information, rather than brash, broad comments.
Show me some DIRECT competitors, not some private firm where I cannot confirm your numbers, a publically traded competitor who is in the exact same line of business, with similar or exact ships and revenues, then we can crack numbers and compare.
The problem is you really cannot do so and unless you can back these claims, I consider it reckless to say some of the things you do, in the way you do.
I have to strongly disagree AGAIN with the .com comparison, how can you say somthing that pathetic? Were you investing in said companies during the .com bubble? Of course you were not. I on the other hand WAS and I know the industry in which you compare, and there is ZERO comparison. There was not a SINGLE public company in the internet/ecommerce/opt... group trading that had even CLOSE to the numbers that DRYS has, especially those who you claim imploded and went away.
For fun, please show me the comparisons, name 5 companies which you see from the .com bubble which traded, had similar revenue and PE ratios, which imploded during the time frame you reference. By the way, the .com bubble was finished by 2003, so please list companies that traded during 1998 or so to 2003 with these qualifying similarities.
Two more comments, first, I agree there is risk and that the business style of Greek companies compared to US companies is quite contrasting. Most people who own the stock and have dug a little further than reading some press releases know this. I find little merit in what you say about George lining his pockets with these measures, especially since he is an over 35% OWNER of a 3 BILLION dollar company as well as other interests, I see no value in your claim of him syphoning off funds for his personal account. It makes no sense and doesnt influence my investment opinion at all.
Lastly, we need to put to bed this issue about Alpha Shipping. I have no pity for hedge funds and firms who invest in corporate JUNK bonds, they have inherent high risk and unfortunately things didnt turn out the way it could have and sometimes you win, sometimes you lose and you cannot look backwards when investing. Those who refuse to look forward and base investment decisions on decade old news can and do miss out on potential winning investments.
I look forward to hearing a reply and specific information regarding the .com claim and the operating expense claim made in the last post.