With the economic turmoil currently plaguing Greece, many investors have lost faith in the Greek ADRs. While there is certainly reason for such concern, managing the situation is simply a matter of going with the flow. As Baron Rothschild stated centuries ago, "Buy when there's blood in the streets, even if the blood is your own." Greece certainly embodies this ethos with many profitable opportunities to be found, especially in the maritime industry, despite the appearance of fiscal hardship. There are several Greek companies which operate on a global scale, but priced as a Greek stock. Dryships Incorporated (DRYS) is one of them.
Dryships was formed in 2004 by the current CEO, George Economou. The company is based in Athens, Greece, and incorporated in the Marshall Islands. The company specializes in the worldwide transportation of crude oil and dry bulk cargoes, while also engaging in offshore drilling services through Ocean Rig UDW Incorporated (ORIG), its majority owned subsidiary. All carriers are managed by Cardiff Marine Inc, and employed through a variety of leases.
Dryships consistently remains ahead of its competitors. It has a market cap of $960 million, a number far in excess of that held by its peers, Genco Shipping & Trading Ltd (GNK), Excel Maritime Carriers, Ltd (EXM) and Eagle Bulk Shipping, Inc (EGLE). In addition, Dryships has a fleet of 47 dry bulk cargoes with a total carrying capacity of 3.4 million deadweight tonnage, as well as nine offshore drilling units. Quarterly revenue growth stands at 19% and gross margin (trailing twelve months) is 61%, both of which are higher than the industry average.
Contrary to the business practices of other companies in its peer group, Dryships's ventures operate on a global scale, reaching various trading routes all around the world. Such habits make it possible for Dryships to present strong resistance to occasional region-specific economic upheavals. It is worth mentioning that there are clear signs that Dryships is transferring funds into drilling services. In the first quarter of 2012, revenue from drilling (pdf) contracts increased by approximately $53.6 million, as compared with the same period in 2011. This trend is also evidenced by the recent contracts undertaken by Dryships, which indicate that about 70 percent of its income is derived from their drilling rigs. Considering the present global demand for dry bulk products, it is clear that such investments represent a far more stable source of income.
The stock is trading slightly above $2, close to its 52-week low. The 52-week trading range shows variance between $1.75 and $4.09. Dyrships' stock is highly volatile with a Beta of 3.28. While it's a risky stock to invest in, the risk is more than fairly priced by the market. The current P/S and P/B ratios stand at 0.8, and 0.24. Dryships used to pay substantial dividends. While, it cut the dividend due to global turnoil, the five-year dividend yield was 6.8%.
Dryships recently sold 11.5 million Ocean Rig common stocks in April 2012, reducing its stake to 65.2%. The net proceeds of this sell reached $180.8 million, acting as a significant boost to the Dryships's balance sheet. Furthermore, the company's quick ratio stands at 0.40. When compared to the overall industry ratio of 0.80, as well as the ratios held by the rest of its peer group, the Dryships is in a much better shape. The company's latest financial statement reported an adjusted EBITDA of $105.5 million for the first quarter in 2012. According to CEO George Economou, a positive trend on cash flow from offshore operations is expected (pdf) through the end of 2012. Therefore, it must be concluded that the short term contracts undertaken by Dryships in the last two years are about to pay off. However, looking forward to the next few years, Dryships is planning to involve mostly in long-term contracts. Dryships has already signed two three-year contracts with Total (TOT) and Leiv Eiriksson, thereby increasing the company's total backlog to $2.9 billion.
Overcapacity in Dry Bulkers
Investing in a dry bulker is a risky decision. Many indicators suggest that the slowdown on the global demand for dry bulk products will persist for the foreseeable future. This hypothesis is also supported by the overcapacity of the dry bulk transportation services sector, and slow world growth rates. In addition, the recent collapse of the DBI (Dry Bulk Index) has had a detrimental impact on many companies in this sector, including Dryships.
While there is an overcapacity in the dry bulk transportation services sector, the same does not apply to the drillers. More significant is the fact that most of Dryships' vessels are currently occupied on long-term contracts. These long-term contracts can serve as a cushion against any short-term price fluctuations. Last, but not least, the recent elections in Dryships' home country of Greece have established a more stable political environment. Subsequently, there have been signs of positive market reactions that are expected to continue through the summer months.
Currently, the attention is focused on other European countries dealing with recession, such as Italy and Spain. With this in mind, if you are seeking for a bargain, the time to buy is now; Dryships is certain to emerge as a profitable choice in the next few months. Ocean Rig could potentially act as a steppingstone for Dryships as the sale of Ocean Rig common stocks, and the resulting cash flow, will help clear the balance sheet at year-end closing. The remaining 65.2% ownership of Ocean Rig will also provide Dryships with a safety cushion.
Dryships' majority owned company, Ocean Rig, has a market cap of around $2 billion. Dryships' 65% ownership translates into an asset valuation of $1.3 billion. At the current valuation of $1 billion, the market is pricing Dryships for a price that is lower than the market value of Ocean Rig stake. I do not expect this mispricing to last longer. That is why I think Dryships is on sale for a limited time.