Dryships' Short Squeeze Potential

Dryships (DRYS), the largest publicly traded drybulk shipping company in the world, has achieved extraordinary growth over the last two years. At the same time, its stock has been hammered by relentless short selling. One quarter of the float is short. Yet the fundamentals of Dryships is strong. The disconnect between the performance of the company and the stock gets more extreme each day. The share price is so down that I believe there is no other publicly traded company with more compelling statistics.

So what are the facts about Dryships. If you go to Yahoo Key Statistics, you'll find:

1. Enterprise value is $3.24 billion versus a market cap of $2.1 billion.
2. P/E of 4.3.
3. Profitability margin of 81.6% and operating margin of 66%.
4. ROA 13.7%
5. ROE 64%
6. Quarterly revenue growth of 195%
7. Quarterly earnings growth of 443%

There are no other companies out there that can beat Dryships on the statistics. Run any stock selector looking at this low a P/E (4!) with this kind of ROE, margins, earnings and revenue growth. If you can find a better stock, please let me know.

A few days ago, Dryships announced at the Capital Link shipping conference that they would earn $651 million in 2008. Last year they earned $475 million. If the stock goes no where, the P/E will drop to slightly above 3. 38% growth in earnings; P/E 4.

With the remarkable earnings of Dryships, this is a great short squeeze.

Disclosure: Author has a long position in DRYS

Comments

[jimmy46]

This is the 4th blog you've written on this dog in the last week,
you must really be desperate as it goes lower and lower.

Take your loss and move on.

[actionjackson]

From a contrarian perspective, I have to agree with this article. DRYS is extremely out of favor right now, yet the arguments of the lemings hold little weight. I see a great buy opportunity here.

[bdp1ConsultingLtd]

George Economou gave an excellent presentation last Thurs at Capital Link, but, to be honest, many of the more conservative investors sitting in the crowd there (standing room only during drybulk sessions with special attention to DRYS and EXM) are spooked by all the volatility in the stock late last year. The forward market suggests flatlining of the spot market, then further falloff later in the year. So I would say that some jam-up of charterers in April (as ore season resumes) could ignite a "fire" in DRYS and cause the momentum boys to jump onboard. But, if this happens, don't confuse it with a really fundamentals driven run-up.

Shipping stocks were always historically very cheap in the pre 2007 days, so the low Price to Cash Flow could probably stand some upward correction, but traders more nimble than me will pick the right exit point after it spikes upward. The low P/CF reflect the inherant volality in the spot market. It's not the type of stock that you could put a kid thru college on, as long as they are overwhelmingly spot. I am neither short nor long here. I sold some peers back in October, right at the top, but would not attempt that tapdance again.

[masedog]

seriously, why do you keep pumping this stock??
how many times are you going to write articles on this company?

[TouchStoneInvestments]

As much as I advocate longterm charters on a 70% fleet ratio I have to admit that an upside of 20-30 dollars over the next six weeks under current conditions is more likely than not. The key as I see it is to establish core long term investors once that is achieved by establishing long term cash flow rates through static charter agreements, increasing dividends significantly, and a possible share repatriation program. These things would give Drys a longrange perspective & forward looking visibility that few businesses of any ilk could match.
Last but not least Mr. Economou being one of the captains of this industry should take the lead and organize a powerful political lobby that would make those responsible within the SEC answer for the unwarranted deletion of the "uptick rule" in 07. This was the catalyst for the massive shorting activity by large hedgefunds that followed!
Any public servants or politicians that quietly participated in this rule removal after a 70 year tenure successfully protecting small investors should be instantly dismissed after they are exposed.

[stephenrosenman]

Reply from author:
Why write about DRYS again? Simply because it is the most undervalued stock in the market bar none. Where else can you get these kind of earnings at such a low price. But again I would like to challenge readers to find another stock with this attractive a year earnings growth, ROE, and low P/E.
To BDP1: DRYS belongs to the drybulk section of shipping. Most of these companies have been public for less than 3 years. Historic prices for tankers are not particularly useful in evaluating dry bulkers. DRYS doesn't have to depend on evaluating P/cash flow because its earnings are far too high. With tankers, you had to look at cash flows because their depreciations were so high they wiped out the earnings. Drys' earnings are so robust they overwhelm depreciation. Yet share price makes for a very appetizing P/E. GEE, put in the depreciation for operating cash flow and the valuations get even more absurd.

[squares7]

Didn't Dryships just file a week or so ago paperwork to issue 6 million more shares, on top of the 4 million shares issued in 2007? Won't this dilute the stock, making the numbers you're citing look less attractive on a per share basis?

[bdp1ConsultingLtd]

I brought up price to cash flow because George Economou's presentation at the Capital Link conference highlighted the low ratios. As I said, this was in the DRYBULK session, where I was sitting, only 30 feet away from the man himself, so mentioning tankers here goes off point. This is DRYBULK. The fact that drybulk rates exhibit some of the highest volatilities out there, and the fact that most other shipping stocks try to build in some stability (EXM is perhaps an exception), is why the ratios are so low. To reiterate, George Economou mentioned the ratios, I am a humble reporter to this blog who was sitting in the midst of the session at the Metropolitan Club. If George thinks they are relevant, than who am I to disagree?

Most analysts are looking at cash flow, and this includes in tankers, or alternatively at the NAV relationship to price. Depreciation does not figure into either of these, its an accounting fiction that's not relevant when asset prices can swing so violently. So traditional EPS is totally irrelevant in looking at shipping stocks and I would not devote a lot of time to it.

Don't get me wrong, I think DRYS could be a good stock for someone playing a spike. The ratio probably discounts more uncertainty than is warranted, if dissected analytically. But the people chartering, and the investors who got burned when the bottom fell out, are not analytical, they are emotional. I had success with a peer company last year in 4Q but I consider myself lucky rather than smart in selling at the right time. As long as the DRYS fleet is so overwhelmingly spot, there is going to be such a high uncertainty discount which is why those very hefty earnings are getting the "low" multiples as noted in George Economou's presentation. The same ratio translates back into the market cap being "low". By the way, George was not the only one lamenting this sorry state. Many of the CEO's were presenting their companies as undervalued on this basis. So, there are always good trading opportunities, but it's not industrial "buy and hold" shipping in the traditional sense.

Speaking of tankers, they did get a bump up when Frontline took a whack at OSG. That deal was possibly done while Freddy and Morten were sitting at dinner together the night before Capital Link in front of 800 of their closest friends, at another conference. Not sure where this will lead, but we can save this for another board.

[SinkingShip]

I would agree and have been riding the dryship boat for 30 months. doubling down at every dip. now at the point with nothing further to invest in a sinking ship. who are you? you write all of the articles on here, what are your qualifications?

[gaucho]

The above guy said "Most analysts are looking at cash flow, and this includes in tankers, or alternatively at the NAV relationship to price."

The cash flow on DRYS is huge while the stock is selling for less than NAV.

ANOTHER STOCK BEING SQUEEZED is CALM
It has a PE of 8 and huge growth. About 85% of the stock is shorted!!!! Look at the price over the last month. The shorts should have bought in at about 8. The stock is over 36 with 12 million shares shorted. That means the shorts are under water over 300 million dollars and increasing.

[loben]

bdp1, regarding your: "the more conservative investors sitting in the crowd there .... are spooked by all the volatility in the stock late last year. "
You have to be kidding. Show me ONE stock that DIDN'T have volatility late last year...or more recently this year. If a stock DIDN'T move down precipitously several times during the last six months, then that stock surely has it coming soon, watch out!
"Conservative investors" who are they? I've never seen one. If they exist, then I think they may be scared to lose all their money because they've never made much.
VALUE and FUNDAMENTALS is the name of the game today. (No financial exposure and ability to generate growing profits.)
VALUE = Buy when Low P/E and expecting awesome earnings = DRYSHIPS. It will soon be run up as more investors search for value.

[User 167747]

Find this discussion extremely valuable, as the author is dead-on that this stock stands out as one to keep an active eye on....I think it is tracking an accurate story about the global economy, and once the world economy shakes off the willies and kicks into high gear, it should move up strongly.

[roee]

i think there is abig problem regarding george economou's credibility- e.g. the rig buys late last year, his other private boat company and the relationship between the two of them and so on.
i can say for myself i work in an investment firm and tried to recommend the stocks to the big chiefs, but the lack of full transparacy and the attitude of old george has detered them completely from investing in the firm.
if the street don't believe the boss, what matters the numbers?
i think that's the problem with this stock. i recommend going to more transparant companies like dsx

[futuresFvalue]

Check out link. Article writer met personally with Jorgos Economou for about half an hour.
wallstreetpit.com/capi.../

[Investor 222]

If the numbers are accurate then the price will go up, short sellers not with standing. I have started a position and will stay with DRYS until it hits $90 again.

[Saint Xinon]

Shares Float 24,350,000
Total Shares Outstanding 36,181,097
Short Interest (Shares Short) 6,033,900
Trading Volume - Average 5,183,700

so it shall take only 1.2 days of trade to cover all the shorts.....

[Hector]

Stephen

I know you are not a finance guy. i suggest you take a couple classes.

"Enterprise value is $3.24 billion versus a market cap of $2.1 billion."

Why is this listed as your # 1.

Do you know what EV is?

Why is 3.24 good vs market cap of 2.1? Why did you list that as your #1 reason to buy drys?

You are right with your pick. Drys is an extremely undervalued stock.

Why?...The key is cash flow.

Drys is projected to earn over 800 m this year in cash/ Last year they generated over 600 m. The will easily do 200 m a qtr or more than 2 m per day!! Even if rates were to be cut in half , they still wuld generate 400 m in cash

One problem is, despite all this cash, drys pays a measly 20 cent dividend.

The second problem , is george is pissing the money on non dry bulk investments, to wit. 400 m (in ocean rig) drrilling rigs and 1.3 billion on 2 drill ships. Would you invest a billion for an investment that will take 5 years to bear fruit?

The 3rd problem is nervousness from banks and their willingness to lend to a capital intensive business. This is an area that george could capitalize on by paying back debt.

Instead of pissing ONE BILLION on non corps investments, he can pay off the bank loans and be in position to pick up the pieces as a consolidator when bad times come. kinda like what JPMORGAn is doing with bear stearns

Despite these issues, drys is currently a cash cow, and is EXTREMELY UNDERVALUED. If george paid attention to them, he could clearly get this thing back above 100.

Solutions

1. George needs to increase the dividend
2. george needs to pay off debt
3. george needs to stop investing in non bulker , non corps assets. If i want a rig id buy a rig stock
4. Lock in current hi rates

[Where's thebeef?]

The problem here is that the dividend stinks. If the earnings are so good, why wasn't the dividend raised? The management is being selfish to the share holders.

[richandmer]

The low prices are effecting all of the dry bulk shipping companies, not just DRYS. Here is a list of most of the public dry bulk shipping companies and how much their stock price is below the 52 week high:

NMM -26.4%
SBLK -24.6%
QMAR -23.6%
PRGN -43.2%
DSX -42.5%
OCNF -27.7%
EGLE -29.1%
GNK -29.9%
DRYS -51.3%
ESEA -44.3%
NM -50.1%
TBSI -56.0%
FREE -46.1%
EXM -64.7%

[Bowman]

I think Hector really answered your question Stephen.

Yes, DRYS is undervalued indeed. The question is whether or not (!) this might be a fair price in the future. Shipping is highly cyclical while DRYS is a cash cow for the moment; the reason being George's bold spot exposure, great growth (also check the order book) and of course huge debt. Remember, many people out there sold their entire fleet a year ago... for now, it may look like a clumsy move, but those are not the kind of guys one puts out of business easily. George knows that, that's why he turned for the rigs instead. It is out of fear of cyclicality. The shipping sector is as close as it gets to a "free market", and assets value as much one would pay for them at a specific point in time.

To get the idea, a ship can change name, flag and papers overnight. Consolidation then wouldn't even be an option...!

When buying shipping stock you really engage yourself in a partnership. Who would you really prefer as your partner?

As one previously put it: do you really think this would go your children through college?

Check Zoulas of EGLE... it's still business at sea, a bit more down to earth though...

[IntrinsicValue]

Here's my attempt to do a valuation:

If we look at 5 year spot rates, they are about half of current 1 year spot rates. So let's go with the 5 year numbers to get a conservative estimate going forward. 5 year spot of $75k per day for Capsize's with a utilization of 97%, gives us revenue of $26M/year per Capesize. With maintenance and depreciation of $1.8M and $2.5M respectively, the net per capesize is $22.7M/year. With 6 Capesize's expected to be running this year - that's $136M net.

Similarly for Panamax's - the net income after daily operations and depreciation is $10.86M/vessel. With 32 Panamax's that's $347M net.

I'm going to ignore some of the other small ships for now. So that's a total of $483M in net income from operations and not including administrative costs, and not including debt servicing.

This doesn't include short term profits that will come from higher short term spot rates - I'm just trying to give a smooth longer term spot rate here. If we estimate a PE ratio of 10 on this more consistent earnings stream - then the company should be valued at $4.8 Billion. Right now it's trading at $2.4 Billion.

[stephenrosenman]

I'm glad my article engendered lots of discussion. But to reiterate:
1. the stock is extraordinarily cheap at a P/E of 3-4 depending on what website you use. The other companies that comprise the dry bulk industry have significantly higher P/E values.
2. remarkable earnings and revenue growth far better than most companies that trade publicly regardless of sector.
3. this is a ROE play. The company focus is growth rather than high dividends that investors are used to in the shipping industry. Think AAPL, RIMM not KMP, MO. Whatever is the best play in the market is where DRYS goes, whether it's going spot or converting to longer term, leasing high rate drill ships. So do not expect high dividends or buy backs.
4. management owns a huge portion of stock here, anywhere from 30 to 50% depending on where you look. The CEO has not sold a share; the value of shareholder's stock affects the value of his. His interests are more aligned to shareholders than most other companies out there.
5. When you take out insider stock holdings, the short position is huge. Drys is extremely volatile. At least a quarter of the stock available is short and nearly a quarter of available stock trades every day. I agree it is not for the faint hearted. Good news will drive this stock quickly higher. I expect rises on increasing BDI or more likely continued excellent earnings. With the huge number of stock trades a day plus gargantuan short positions, I do expect the shorts to get crushed.
5. If you look at the previous discussions, you will see the tremendous "short"
passion out there. Alot of money is betting against this company but, in sum,
the stats of this company are hard to beat. You will note no one took me up on the challenge to find any other publicly traded company with this high a yoy revenue and earnings growth, ROE, and low P/E. There is none.

[drys long]

Saint Xinon "I assume fair value should be 30"

If you are arguing that steel companies are moving closer to iron ore mines does that also mean that farmers are moving closer to fertilizer supplies?

As for dry bulk shipbulding, wouldn't high steel prices make newbuilds more expensive and existing vessels more valuable?

I don't mind short sellers touting their position - if the reasons make sense I am happy to say that we agree to disagree and let the best man win but your reasoning is weak and you offer no calculation as to how you get to $30. Is that just your gut sense - that the stock will go down 50% from here? Good luck

[User 169626]

A lot of good things have been said about DRYS and I am long for those reasons. But, I was encouraged even more recently when I read that ships are returning from the US full instead of EMPTY now because the dollar is so weak and that makes US goods more marketable overseas.

[Lion is King]

Soon, Dryships is going to need one of their own Cape size vessels to move all their multimillion earnings to their bank account. This stock is ready to POP!!, my doom and gloom friends. Long DRYS!!!!

[cupcake]

If you want a great dry company look at Golden Ocean,buy through Scottrade,$5.45,paid .88 cents past year,will pay over $1.40 going forward. 30% owner is John Fredrickson.Knows more about dry shipping then 50 george Econ....john is a great leader--George doesn't take care of shareholders. And yes I own over 30,000 shares--putting my money where my mouth is.
You want deep drillers---Seadrill--s... owner

[Fear]

I own 700 shares and hope it hits $165 dollars a share by june I will almost triple my money please hurry lol

[uluv2smile]

DRYS seems like a buy to me...What are the shorts seeing that is not in the article?

[samtty]

Yes I agree this stock is very cheap if you look at the stats, and fundamentals also great for now, this stock became more value play now, as long as shorts are beating up the stock , stats and value doesnt matter, but becareful shorts, you will get crushed in Apr month, usally Apr - july very demaning time for these dryshippers, so fleet rates will go up as much as 10-20% in this period.

If you are watching BDI it is already started ticking up from the past few days, and it will go back 9000+ range very soon, then shorts will have big problem, then you will see this stock will go 80+ in no time.