On August 17th, 2012, we brought you "11 Stocks Under $11 With Institutional Buying." Today we will talk about Dryships (NASDAQ:DRYS), which falls in the list. The purpose of this article is to talk about the fundamentals of the company, and if the valuation of the company justifies investing in the stock.
The top institutional holders of Dryships stock as per the SEC filings dated June 30th, 2012 are DEUTSCHE BANK AKTIENGESELLSCHAFT (24%), Guggenheim Capital, LLC (6.6%), CAISSE DE DEPOT ET PLACEMENT DU QUEBEC (3.65%), Futuris Asset Management AB (3%), and Morgan Stanley (3%).
Now that we have a list of the top believers of Dryships, lets talk about valuation. Dryships stock is trading at $2.25 versus its 52-week range of $3.84, and at a trailing twelve-month EV/EBITDA of 10x, which is at a premium of the historical P/E average of 6x. Looking at its peer group, Genco Shipping & Trading (NYSE:GNK), trades with a 10.5x EV/EBITDA multiple, and Eagle Bulk Shipping (NASDAQ:EGLE) trades with a 16x multiple. Do the fundamentals support this valuation?
Lets discuss fundamentals: In August the company announced Q2-2012 earnings of an EPS loss of $0.03, below consensus of $0.05, primarily driven by higher than expected operating expenses and interest expense. That being said, the biggest positive for the stock recently has been the finalization of the $700 million contract with Repsol. Additionally, on September 11th, the company announced that its subsidiary ORIG has received a $112 million letter of intent from a oil major for a 6 month contract. Both these achievements could contribute to the long-term growth of the company and a payback to the shareholders of Dryships stocks.
The bigger catalyst for the long-term fundamentals of Dryships is the syndication of the $1.35 billion loan facility. As of June 30th, 2012, the company has $366 million in cash, and $4.7 billion in total liabilities. Given the high leverage, and the need to raise capital for growth, the $1.35 billion in financing will come handy. The lack of financing has been an overhang on the stock, which is now the only and the most significant mover for the stock.
Conclusion: With Dryships, we will stress on the fact that this is not a valuation story, but instead a balance sheet story in the short-run. It is important to track the financing needs of the company to see any upside in the stock in the near-term.
Written by Kapitall's Sabina Bhatia. Tool provided by Kapitall.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.