Will DryShips Steal Your Booty?

With shares of DryShips (NASDAQ:DRYS) trading at around $2.18, is DRYS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

sea-shippingThe shipping industry is in disarray right now, and that has been the case for several years. When there was demand and optimism, companies like DryShips continued to build ships in order to help fill future orders. However, everything came to an abrupt halt in late 2008. Unlike other industries, shipping didn’t recover. The lack of global demand outweighed the power of United States stimulus policies. There is some renewed hope in the industry since China is now taking its own stimulus approaches. This could lead to increased demand, but that will still be offset by weakness in Europe, Japan, and to a lesser extent, the United States.

If you’re a true optimist, then you will be happy to know that calls have heavily outweighed puts in DryShips recently. Even more reason for optimism is that analysts recently predicted a rise of roughly 20 percent in the Baltic Dry Index in 2013.

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The biggest hurdles at the moment are oversupply, a potential increase in fuel costs, and the upcoming debt ceiling debate. In regards to oversupply, it has gotten so bad that DryShips is considering demolishing some of its 40 dry bulk carriers. The fundamentals for DryShips don’t indicate smooth sailing, either. Margins are weak, cash flow is poor, and there is a Forward P/E of 43.40.

Let’s take a look at some more important numbers. After that, we’ll mention one factor that may be a selling point for DryShips.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for DryShips is weak. This is normal for the industry, especially as of late, but that shouldn’t be used as an excuse. The balance sheet is also in negative territory.

Debt-To-Equity

Cash

Long-Term Debt

DRYS

1.90

$660.84 Million

$4.45 Billion

EGLE

2.12

$18.70 Million

$1.14 Billion

EXM

2.35

$33.86 Million

$1.03 Billion

 

T = Technicals on the Stock Chart Are Weak

Sticking with the optimist theme, you can at least say that DryShips has outperformed Eagle Bulk Shipping (NASDAQ:EGLE) and Excel Maritime Carriers (NYSE:EXM) over the past three years.

1 Month

Year-To-Date

1 Year

3 Year

DRYS

24.00%

35.62%

-0.23%

-65.88%

EGLE

17.71%

50.67%

-44.17%

-89.54%

EXM

35.33%

40.03%

-60.20%

-91.52%

 

At $2.18, DryShips is currently trading above its 50-day and 100-day SMA, and below its 200-day SMA.   

50-Day SMA

1.90

100-Day SMA

2.12

200-Day SMA

2.35

 

E = Earnings Have Been Inconsistent

Earnings for DryShips over the past few years might remind you of a splatter painting. It’s rare to see such a wide range of numbers that look as though they have come from many different directions and randomly splashed onto the page. There is no pattern whatsoever. This isn’t comforting to an investor.

2007

2008

2009

2010

2011

Revenue ($)in millions

582.26

1.08B

819.83

859.74

1.08B

Diluted EPS ($)

13.40

-8.11

-0.13

0.61

-0.21

 

When we look at last quarter on a YoY basis, we see an increase in revenue, but a decrease in earnings.

9/2011

12/2012

3/2012

6/2012

9/2012

Revenue ($)in millions

318.05

328.18

247.50

336.14

343.64

Diluted EPS ($)

0.07

-0.02

-0.12

-0.05

-0.13

 

T = Trends Do Not Support the Industry

It would be difficult to find a weaker industry. By the admission of DryShips itself, the industry is severely depressed. The global economy plays a tremendous role, and there isn’t much reason for confidence in the near future. It is possible that we will continue to see artificial growth from China, which could help for a while, but don’t expect long-term results.

Conclusion

So far, DryShips looks like a terrible investment. However, there is one ray of hope. DryShips was wise enough to take a stake in Ocean Rig UDW Inc. (ORIG). Ocean Rig is a deepwater driller with massive potential. Unlike shipping, deepwater drilling is a hot and growing industry right now.  

Considering all factors, DryShips is a high-risk/high-reward play. Unfortunately, there is too much risk right now. DryShips is currently a WAIT AND SEE.

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