DryShips, Inc. (symbol DRYS) is another of the troubled dry bulk carriers that have been lurking at the depths of the market. As the world economy has tanked, most of these shipping companies have lost most of their market value. DryShips, however, appears poised for a rebound.
The simple analysis is this: at yesterday's close, DryShips was selling at $2.72 and the consensus estimate for earnings was 44 cents for 2011 and 58 cents for 2012. This translates into a P/E for 2012 of less than 5. Normally, such a multiple would mean that the uncertainty of the earnings is great. DryShips, however, just reported third quarter earnings, and the results seem to indicate just the contrary. First of all, the biggest part of DryShips is no longer the dry bulk carriers but the ocean drilling vessels. These rigs can drill in deep and treacherous waters. With the price of oil back close to $100 per barrel, the push for deep water drilling is coming back in full force. Who knows, maybe even the USA will start such drilling again in the Gulf of Mexico in earnest. Even without the American market, however, there are many new fields off Africa and South America where the deep water drilling platforms of DryShips subsidiary Ocean Rig UDW Inc. will be in demand. The company has been successful deploying these rigs profitably and the market there keeps improving.
On the shipping front, the company reported that it is already under contract for charters for a bit over half of its 2012 available fleet days at an average rate of about $35,000 per day. I would like to see a higher rate of presale for this fleet, but the number is high enough to indicate that nearly full usage is likely. Moreover, the daily rate for the segmant already sold is clearly profitable.
The tanker segment is less transparent, but it is the smallest part of the company. With the rise in oil prices, there should be demand for these vessels which should permit the company to meet the estimates.
There is, of course, a down side to DryShips. The company seems often to do things that seem either highly risky or sometimes bizarre. So far, these have all seemed to work out and it has been a while since the last of these episodes.
In short, since it seems that profit estimates are more likely to go up than down, buying stock which is selling at less than five times next year's earnings seems like a sensible thing to do.
Let me add one final note. DryShips is not a safe and secure investment; the stock is volatile and the company has much greater risk than most. It is useful for part of the portion of your portfolio which you set aside for high risk, high return investments. Indeed, before you invest in DryShips you should do your own investigation so that you better understand the true nature of the company's business. It is the kind of stock that may need to be sold quickly when the conditions warrant, so you should only buy it if you fell that you can recognize signs that indicate it is time to get out.
DISCLOSURE: I am long DryShips.
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