Dryships: Undervalued Compared to Competitors - and the Market

In my last article, I pointed out how Dryships (DRYS) has been panned by the investment community despite a low PE and formidable earnings and revenue growth.

To recap, Dryships is a shipping company that hauls commodities such as iron, coal, and fertilizers around the world. It reached a high of 87 less than a month ago but has been dropping quickly to 60 as of March 14 even as the money that shippers receive to charter their vessels has been robust. The company has been criticized because:

1. Its CEO George Economou uses his privately owned companies (Cardiff) service Dryships' vessels, something which worries investors about conflict of interest.
2. The company recently invested in a drill ship company, Ocean Rig, a move out of its traditional drybulk sector (one I believe will add value leasing expensive deep water oil rigs. These rigs lease at 650,000 a day!)
3. Recently, Dryships did a large secondary of 6 million shares, increasing its share count to 42 million. The proceeds will be used to pay down debt and improve its balance sheet. (Dryships has been in a period of huge expansion in its fleet).

Low share prices of DRYS reflect the Street's concerns about management, which I think are overblown. Management has delivered stellar financial results. For instance, earnings 2007 rose 659%.

What is particularly reassuring about management's abilities is the low expenses involved in producing those remarkable earnings. Their costs are lower than their competitors. Their use of Cardiff for ship maintenance appears to enhance their earnings. Comparing Dryships to others in the industry, we find a very low PE - DRYS 4.5, Genco (GNK) 13.8, Eagle (EGLE) 19, Diana (DSX) 11.59.

Below is a chart looking at these four companies' revenues, expenses, and interest payments. I've left off gains made selling vessels (which would have helped Dryships) and depreciation expenses. Of note, taxes do not play a role here as Dryships pay no taxes (another remarkable plus for Drys and most of its drybulking cohort).

As you can see, Dryships' expense/revenue is extremely favorable at 21%, a testimony to management. Once interest cost has been taken into account, their 79% Net-Interest/Revenue easily bests their competitors.

Bottom line: Dryships is undervalued compared to its competitors and the market in general.

Disclosure: Author has a long position in DRYS and GNK, none in EGLE and DSX

Comments

[User 122409]

Either his math is wrong exp/revenue should be 16% or the expenses are really 48.9 million.

[User 164606]

The problem with DRYS is that its divident is way too low. It keeps the big boys away and makes the shares too volative and subject to excessive speculation. Another problem DRYS's has is that an investor cannot see a valid reason why the affiliate company would make the fee in the deals made for DRYS and then apply the to get greater share than DRYS in any acquisition. The oil drill deal is a good example. The deal was good but the shares bombed because of this. I saw it coming and when it came I wasn't surprised. The big boys would not bother with relationships like this because they could be costly in the future. The smallest scandal would have the shares in a free fall.

[joli]

Yeap, George is by far the best manager of them all and Dryships' qualitative and financial growth is proof. As for Cardiff, it really is the most efficient manager out there and its all kinds of fees are certainly at par if not better.

[ACapitalist]

Looks like to me that they have issued/ plan to issue 10.8 to 11.4 million new shares when I read the 3/07/08 filing. As a shareholder, this makes no sense to me as they are projecting a $800 to 1,000 million cash flow for 2008. Unless they have some major purchase in the works, they will have no debt at the end of they year. These guys just suck at investor relations. They don't explain what they are doing and repeatedly do things to piss off thier shareholders. I know this company is very very cheap, but the market is voting every day on managment's ability. I hope they redeam themselves shortly.

[jimmy46]

The most important thing about any stock is
the HONESTY of management.
That is lacking here and that's why the stock is at a discount.

Read an article in a recent Forbes mag for more details.

[penelope]

Very Interesting article.
Questions:
Has the Ocean Rig produce any oil? Is Ocean Rig a publicly traded Co?
Is it bringing any income to DRYS at the present, or is it expected to do so only in the future?

[erik5150]

Again pal, you're a bagholder who deserves it. Quit pumping this chump stock. Gee, you must be down 20% since your wrote your article only 4 days ago!!!

[drys long]

Ocean Rig is a publicly traded company in Norway. They own two high-quality drilling rigs that have been working for several years. When compared to other drillers OCR stock isn't particularly cheap. It doesn't really make a lot a sense to have a company with only 2 rigs as any operational problem can knock out half your cashflow. The investment in OCR can be debated - I don't know if the 30% purchase was a great a deal or not - but I do know that deepwater offshore drilling is a great business. I imagine that DRYS will record a proportional share of OCR profit as minority interest earnings on their income statement - does that sound right?

[richandmer]

Even though DRYS is down, I don't think it is a vote against the company or owner. If you will take a look around the industry, you willl see that all dry bulk shipping companies are down - by approx the same amount.

No one seems to know the reason for the broad market down turn, but it probably started with the recent downward move in the Dry Baltic Index. Of course, the general market is also adding to the move. However, on a personal note, I do not want to own DRYS - just because I don't like the owner.

[bulkshipper]

Past history is the best predictor of future results. Inspite of George's "curious" ways, he will blow the pants off competitors at next earnings report and the big boys will be buying. All shipping analysts indicate that the BDI will be strong this year and Drys' is in the best position to take advantage. Maybe Goerge isn't a genius but the proven history of his charter negociators at Cardif are. Ocean Rig deal at worst will break even at best could do better than shipping. PE at 4.2 I'm in even with the curiousities.

[jimmy46]

Looking at ten different shipping stocks this looks like the best one to short, even with its 7% loss today, it's still up 164% from its low of the year.
The second most overpriced one is only up 61%.
The rest are near the lows of the year.