Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Found this on Ico's board. Sorry, I forgot how to link.
edit: maybe this will work?
http://biz.yahoo.com/ts/081014/10442216.html?.v=1
____________________________
RealMoney by TheStreet.com
DryShips Looks Too Good to Pass By
Tuesday October 14, 12:59 pm ET
BySham Gad, RealMoney Contributor
Since I wrote about the dry-bulk shipping sector a couple of weeks ago, the overall industry has tanked along with the historic 25% weekly decline in the Dow. In fact, commodity stocks have been hit far harder, and most dry-bulk shippers are down an additional 50% to 60% in two weeks. We are now reaching valuations where the parts are vastly worth more than the whole.
ADVERTISEMENT
One particular business, DryShips, is particularly intriguing, because the company plans to spin off an ultra-deep-water business that could command a share price in excess of the current stock price today, meaning you would get one of the largest dry-bulk shipping fleets for free.
Even more intriguing, the current market value is now at levels where a liquidation sale of the shipping fleet would easily exceed such value. This valuation is happening only because massive amounts of distressed selling, along with a shutdown of inter-bank lending, has sent equity prices to the most irrational levels since 1974.
It's important to remember that unlike Internet stocks, which lost nearly 80% to 90% of their value in the dot-com bust, what's happening today is affecting businesses that are making good money. You have got businesses that were trading at 8 times earnings last month now selling for 2 times forward earnings, meaning that if profits decline by 50%-75% next year, you still have a fantastically cheap business. In the case of DryShips, the story is even better.
The Asset Play
DryShips currently owns 49 ships. The company's market value is currently around $1 billion, or more than 70% less than what it was just a year ago. Remember that dry-bulk shippers move the goods that move the global economy -- grains, metals -- so it's not hard to see why the stock price has tanked. But it has simply tanked too far relative to the company's assets (not to mention the possible earnings -- more on that later). Here's an abbreviated look at what its balance sheet looked like, as of June 30, 2008:
DryShips Balance Sheet
Cash $ 294
Total current assets 456
Vessels, net 1,985
Drilling rigs 1,392
Other assets 853
Total Assets $4,980
Total Liabilities 3,032
Total Equity $1,948
Over the years, DryShips has generated earnings through two engines: shipping revenue and asset sales. The acquisition and disposal of ships is very important to shipping companies, as they are always looking to lower the average age of their fleets. Historically, DryShips has been able to book gains of 50% to 60% on sales of ships. And since accounting rules stipulate that vessel values are to be classified net of depreciation, we can assume that the book value of the ships above is understated by 50% to 60% on the basis of real market data of the sales.
This would suggest a true book value of about $3 billion to $3.2 billion, or equity value of nearly $3 billion to $3.2 billion, or three times the current market value. The company currently owns two ultra-deep-water drilling rigs that are valued at $1.4 billion. These prized rigs are in ultra-high demand because of the increasing need for their super-deep drilling capabilities. It takes years to build them, and big oil companies such as Petrobras contract them out before they are even built. We'll assume no premium to book value for them, but odds are high that if DryShips put them up for sale, they could easily fetch a premium.
But that's not all.
The Spin-Off Play
DryShips has announced that it plans to spin off its newly developed ultra-deep-water business as a stock dividend to existing shareholders later this year or early 2009. Each existing DryShips shareholder will get one DryShips share and one Primelead share, the new name for the UDW business.
Primelead currently operates two UDW rigs and will have a total of six rigs over the next two years. On the basis of comparative valuations of Transocean, Ensco and other UDW players, management forecasts an equity value of $2.5 billion to $2.8 billion for Primelead.
This past quarter, the first in which the drilling rigs were working, two rigs produced operating profit of $30 million. Normalizing this out for six rigs over a year would mean operating profit of $360 million ($15 million times 6 rigs times 4 quarters), so an equity value of $2.5 billion is not rich.
DryShips will own 75% of Primelead after the spin-off. Divide this 75% interest (about $1.9 billion) into 62 million shares (DryShips currently has 42 million shares outstanding but has recently announced issuance of 20 million shares to fund new vessel acquisition), and you get a $30 share price for Primelead.
Today, DRYS trades for about $22 a share. In other words, Mr. Market is valuing the shipping business for less than nothing. Even if Primelead commands a market value of $15 a share, the shipping business is worth a great deal more than $5 a share.
For the first half of the year, DRYS has earned over $7 a share in earnings. The third quarter has seen shipping rates decline precipitously. When I look back at 2005, a time in which charter rates were a notch higher than they are now, DRYS earned about $3 a share for the year with half the shipping fleet.
You don't need to be a genius to make money in this market now. You just need to realize that a business like DRYS is beyond cheap -- it's a steal. Sooner or later, you will make money at these prices.
Tonight I paid 3.50 for premium up in Redding, CA. I read that prices have declined about 50 cents the past month up there.
You're up late. Coming up with Friday's plays? :)
As I was driving past the refineries near Benecia, I thought of Pantera and thought he was due to come back too. Gas prices aren't down as much as the crude. Maybe FTO is benefiting?
I thought the positive guidance would fatten DECK up a bit, but I can't see them holding it while everything else is going down (although it looked like they could that one day last week). For some reason - that I can't put my hand on, I don't quite believe their guidance.
It seems as though many are looking for a retest of some lows, but I can't quite see going as low as we were on Friday, but what do I know?
Hey AD, when I saw DECK up early yesterday I thought of shorting, but I thought I would have a chance later on at a higher price. No such luck -- yet.
Joe, The MWR you posted a few days back also caught my fancy so i joined in . I can't remember if that was Thurs or Fri but I see that I am up. These preferred are working out very well for you thus far. Is the plan to hold some of them longer term and trade others? Like common shares, these issues are experiencing tremendous volatility.
Friday was an ugly day for me. I got scared when I read about the possibility of the global markets being closed so I started selling. Not 5 - 10 minutes later I saw the rise so I jumped back in to a lesser extent - and ended up underwater at the close on those shares. Today I'm ok with it, but I was amazed at the fear I felt all of a sudden, when I was working so hard to keep things in check.
I've aged a lot this month. Should have gone to Italy.
I wish I would have thought of that.
Hey, do you still look at CCJ from time to time? Another sad story with everything else. The oil based stocks are coming back strong today.
Paul, I hear you on the noise front. Two weeks ago I had the jackhammer thing going on next door for over 4 days. It was supposed to be four hours but they found more concrete. I was trying to block it out but the noise really messes with you. Made the chain saw and flagstone cutting seem tranquil. :(
Hey Lee, its good to see you back. What a night to start!
You used to be funny. I miss the old mainehiker -- from about 4 years ago. Don't tell me GW did this to you. Somthing else took hold.... So sorry.
of course cy! hopefully I stil have a place for you and yours here in ca! Do you like to fish?
Will that help me tolerate tomorrow?
Sometime during the night (3am?) I woke up screaming. Never did that before. I should have saved the scream for now but I'm just stunned.
Wouldn't that be a variable annuity versus a fixed annuity? Frankly, Newly, I don't see you needing or desiring either one.
Newly, your response to 12B was a lot nicer than the one I thought of.
Does anyone here have any experience or knowledge of 403B plans? My brother has to choose between the following providers and I don't know how they compare (fund choices, fees etc.) If they offered Vanquard I would have suggested that but, alas, that is not on the list. Many thanks!
American Century Services LLC
AXA Equitable Life Insurance Company
Cadaret, Grant & Co.
Confidential Planning - Smart Choice
First Investors Corporation
Franklin Templeton Bank & Trust
ING National Trust
Mass Mutual Life
Metropolitan Life Insurance Co
Mutual, Inc.
NY Life Ins. & Annuity Corp.
Oppenheimer Shareholder Svcs.
RiverSource Life Insurance Co of NY
Security Benefit Life
Travelers Life & Annuity
I thought the slowdown in construction was to get the air quality problem under control for the Olympics. However, if the real estate prices are falling that is a different tell.
I get how devastating deleveraging is (have done more reading since yesterday). I see that as the problem now, not inflation. You have helped to convert me. I must have had blinders on as the info was out there.
<<The bigger question for me is if there will be another plan that is going to be proposed before this one is enacted.>>
Very interesting scenario.
I was thinking more along the demand axis (China and India) for commodity prices. You obviously disagree with that Rodgers guy (of Soros fame). Should your scenario bear out, it will be quite the challenge for Russia.
Joe, I thought the banding together was already a mission for your board.
I have to get out of the house. The noise from next door is really bothering me.
$14 Trillion represents the walk aways the next 4 years? Hard for me to believe it, but I guess in this day of people without integrity and bearing personal responsibility it is possible.
The 14 Trillion number comes from the debt reduction of 350% GDP to 250%? The number of zeros blows my mind. (That and the constant jack hammering from next door the past four days!)
So China and India won't be able to soften the fall of commodity demand?
It seems as though your outlook isn't as dire for the equity market to the end of this year. Am I reading you correctly?
Thanks for your thoughtful and thought provoking answers. Little did I know what answering Joe's message earlier would lead to. I am thankful for the discussion.
Your AESpC is wonderful testimony for Joe's search for good preferreds. The question is, what to buy now - or near your cycle low that is due to arrive shortly?
I guess I'm showing my bias against corp bonds. Are these bonds callable? Are good prices for the bonds available if your name isn't Warren Buffet?
Hey 6% sounds pretty good in AJs deflationary environment. I'm just not convinced of that as yet. Maybe someone has to hit me over the head.
I had no money in the early 80s either, to take advantage of those way high interest rates.
Aj, I've read your posts on deflation with interest - esp the ones that depict the price of some food stuffs coming down in the next months. I can see that happening too, although not to the extent that they erase the increases from earlier this year. What i have a hard time reconciling is that the gov't via the bailout plan and any other action it might take, wants inflation to keep prices high and provide some support for housing prices in particular.
Maybe the part I'm missing is the allure of the dollar compared to other currencies in this environment. I see that as a short term bias for now. As I write this I recall many years ago Zeev saying that there are political forces to tear at the Euro. I must admit, I have no idea how that is doing at this juncture.
Do you still see the dollar as relatively stronger if/when the rates are dropped. I see the Europeans have kept their rates steady for now. They want us to blink first.
Without knowing more about this retired person, I would disagree with your advice. To put a portfolio entirely in bonds when the equity market is near its lows is a poor move. That said, if this person can't sleep at night, then the money manager is not doing their job, as it is the person's risk preferences that are paramount.
What kind of bonds would you do here anyway? Even Muni Bond funds are losing money (if you look at NAV). Buying bonds outright might be a better play, but I would wait a bit. Hell, what do I know, but I do feel that there will be some inflation in the shorter term with the devaluation of our $. When the dust settles (4 months or so?) I think the time would be better to buy bonds. But going without sleep for 4 months is a ticket to the looney bin. :(
edit: I am basing my $ devaluation on the assumption that the House will pass this bailout.
Sweet! Thanks for letting me know. Wasn't much happening last I looked.
Got it.
Wow, they finally stopped jackhammering next door. Must be lunchtime.
I figured they convert to common but I guess what I should have asked is if you were playing any of that security type. From your response I gather that FNM and FRE had some?
I thought I read short sale ban extended except for convertible preferreds, whatever that is.
You are not alone. It's screwed up my Street Smart Pro chart.
edit: I see it's fixed now.
What are you using to gauge fear? The high VIX doesn't do it for you?
Considering your recent stellar record in calling these drops, I hope you are wrong about the possibility of a further 1,000 loss.
Excellent calls, to bad I didn't heed them. The optimist in me is having a tough time with the reality that is showing.
Wow, that seems really bizarre to me.
AGM was a Zeev play many many moons ago. I'm not sure what he liked about them and its a very different environment now anyway.
I find this comment worse than a political statement.
Shakedown Street by the Grateful Dead was playing as I awoke this am. Thursday am, it was Freefallin'.
RE: AIG I think it sends a bad message to redo the negotiation. Call it off because it suddenly looks like the taxpayer will come out ahead, but let it go if there are losses? Unreal.
You are probably right, that is why I will ultimately wait until Monday. DECK warn? Hadn't really given it much thought.
Gosh, I'm tempted to short DECK again. I feel naked without it. I'll wait for a little higher. Might have to wait until Monday.
How fun. If I didn't change my sell limit on AFF (partially based on your gut - :) I see I would have sold the shares on this latest thrust up. Wish I had more. Wow, I am a piggy.