DryShips: Look Out for Those Forward PEs

[Update below] Time to reprise a very old, mothballed feature of The 'Wart: Arbitraging Barron's, wherein I look past the Barron's pay wall link to some of the more interesting items of the weekend. With godspeed, I'll try to keep it up every weekend. From this past weekend:

Friendlier Waters Ahead For Cargo Carrier DryShips (DRYS):

Global trade might slow this year, but it will come back eventually, and DryShips' profits -- and shares -- should move up over the long term, even if 2008 growth turns out to be lower than Wall Street expects. At its recent quote of 64, DryShips stock was trading at a price/earnings ratio of 3.5 times consensus analyst earnings estimates of $18.18 a share this year and about 5 times the $12.22 forecast for 2009. DryShips also trades at a more than 50% discount to its peers, although rivals generally seek long-term contracts, which are less volatile. DryShips sports a healthy balance sheet, with net debt equaling about 40% of total capital.

Update: In the comments on the article above mentioning DryShips, commenter Mark leaves a very insightful comment on the global shipping industry. I thought I'd promote it here, as it's more than I could offer.

This article fails to mention that dry bulk spot rates are extremely volatile and forecasting where they will go is subject to massive room for estimation error, even for industry veterans. Thus forward PE can be very deceptive and is a silly way to look at the companies. Last year, Clarksons research surveyed a large collection of readers to forecast where rates would go in 2007 and EVERYONE was wrong by a large margin (they spiked massively). They can also spike massively downward in the same fashion... If forward earnings ends up being 80% lower, which historically isn't a crazy notion at all if you look at a rate chart, your PE will be 5x what you thought it was. Thus using forward PE is pretty silly given its forecast error range is so wide as to be near meaningless.

Also, the capacity for shipbuilding yes is indeed "tight", but for bad reasons. It is fully booked to the max and the industry is about to see the largest supply growth ever, for multiple years, going forward. If demand falters in any way and this supply comes on, it will be a slaughter for these companies as they undercut each other gruesomely as they have in the past, since ships must essentially be utilized at all times else they are losing money, and it's a very fragmented market. Not saying that it's all clear cut as to where things will go, but this Barron's article barely touches on the most important issue/risk of massive supply growth which is basically the entire swing factor. They should do their homework a little better.

Comments

[InvestingPe...:]

While there is truth here concerning the uncertainty factor involved in any forward-looking estimate, understanding the sector's environment is the greatest indicator in evaluating a company's role in the future market. In our review of DRYS we firmly stand by the views expressed by this author. Our recommendation given on 3/17/2008 has to date revealed a 24% profit for our readers and can be found here: investingpennies.com/i...

2008 Apr 08 10:10 AM

[Camden:]

For commenter Mark - Re: "If forward earnings ends up being 80% lower, which historically isn't a crazy notion at all if you look at a rate chart, "

Even if rates dropped 80% from where they are today DRYS forward earnings would drop anywhere near 80% because current rates are more than double the year ago rates and more importantly, the company hedged (locked-in) a large portion of it's contracts at the very high rates being offered in the fall (at the top of the spike).

If you think "... using forward PE is pretty silly given its forecast error range is so wide as to be near meaningless" then you must think there is no meaningful way for an analyst that follows DRYS to do his job (to forecast earnings). THAT'S silly.

2008 Apr 08 11:43 AM

[Stephen Ros...:]

It is very unlikely that ship builders will complete their orders because the yards where the ships are to be built are often green fields. Also as the price of steel goes higher, fewer order will go in and likely orders will be canceled.
Even with spot rates far lower DRYS will be undervalued because their business is so very profitable.
As they diversify into deep oil drilling, their profits will be even better.

2008 Apr 08 12:15 PM

[papita:]

I think The Stalwart should shut their mouth because I own this stock and I want it to go up. How's that for telling it like it is. Others may want to express themselves in a similar way, but are afraid to do so. I am not!

2008 Apr 08 02:05 PM

[jimmy46:]

the story was good

The comments mostly idiotic

2008 Apr 08 05:02 PM

[Tie D:]

There is one major flaw in your logic, shortie. Most of Dryships fleet are already in longterm charter contracts, and thus, the volatile rate will be pretty much meaningless for the next year. Try to find another angle to cast some uncertainty on this company's future to get your puts into the money.

2008 Apr 10 02:11 PM

[johneeeeee:]

this stock is going to hit 150 by this time next yeay

2008 Apr 11 07:11 PM

[johneeeeee:]

this stock is probably the most undervalued companies thats publicly traded. all their competiters suck compared to them especially diana shipping

2008 Apr 11 07:16 PM

[User 166319:]

OK, Here it is bottom line DRYS is the only real valued stock in this group, Frontline does have value but not growth, all the puts and shorts have plagued this stock and it is a short recession away from explosion. Not hardly any company in any sector has its potential or Capital. It will bottom again but the difference will be when growth once again hits the market this company will not see a ceiling like that of its competitors, it is a VERY solid pick for Longs and within the year.

2008 Apr 11 11:40 PM

[User 166319:]

Guess what's starting, did you get in?

2008 Apr 18 04:47 PM

[egarl:]

I love a company making more money per share than Google at only 14% of the price. The big surprise is how much coal is being exported from the US because of cheap dollar.

2008 Apr 21 12:38 PM