Stocks that Float: TANKERS & DRY BULK SHIPPERS

[xanadu90]

DRYS
Bullish on Commodities? Consider DryShips
posted on: April 01, 2008 | about stocks: DRYS

The parabolic growth rate of China and India, with a combined population almost ten times that of the United States, continues to drive an unending global demand for iron ore, coal, fertilizer, grain, and oil. This is clearly evidenced by recent trends in the leading positions within each sector.

Growth sector indicators (3/26/2008):

Company - Sector - Gain from 52-week low

Nucor (NUE): iron-mining 72 %

Vale (RIO): iron-mining 102 %

Rio Tinto (RTP): iron-mining 83%

Peabody (BTU): coal 36%

Fording (FDG): coal 138 %

Consol (CNX): coal 105%

Potash (POT): fertilizer 209 %

Mosaic (MOS): fertilizer 288 %

Transocean (RIG): deepwater drilling 69 %

Diamond (DO): deepwater drilling 49 %

The dry bulk carriers are the primary transporter of iron ore, coal, grain, and fertilizer – a necessary link in the global industrialization boom. DryShips, Inc. (DRYS), the largest U.S. listed dry bulker with a market capitalization of $2.3 billion, reveals staggering growth metrics. They own and operate a fleet of 39 vessels and 8 new builds including capesize and panamax vessels. Year on year revenue growth weighs in at 195% with earnings growth of 443.5%. A trailing price to earnings of 4.70 highly discounts the phenomenal growth. DryShips, operating on a combination of “spot charter” and “period time charter” rates, is well positioned to take advantage of the strength in rates and will likely continue to lock in longer time charters as the rates continue their upward trend. 63% of their fleet remains unfixed hence will benefit from rising rates. With the advent of summer and fall, the BDI is poised to begin its ascent from a recent value of 7884 and is expected to remain strongly bullish in the foreseeable future.

Based upon the current charter rates for vessels (2/15/08), DryShips’ daily revenue is approximately $2.25 million. Their average expense per day per ship in 2007 was $6,387. This extrapolates to daily expense of $249,093 for 39 vessels. The net daily revenue minus expenses is $2.01 million. Hypothetically, even if bulk rates do not increase for the remainder of the year, earnings for 2008 should be $822 million. Recent guidance from the company places 2008 EBITDA at $840 million. With the BDI close to its yearly nadir, both of these estimates could prove to be extremely conservative. For comparison purposes, 2007 revenue was $582 million. Also, in light of global demand, future estimates are likely conservative. At an average vessel age of 8.9 years, DryShips maintains one of the newest fleet of vessels in the industry. The older vessels typically have more difficulty obtaining long-term time charters and usually lease for lower rates due to increased dry dock time. Lack of financing, inadequate shipyards, limited crews with experience, and rising cost of steel all will mitigate an influx of new ships in the near future. Increased scrapping of older vessels, prized for the value of steel, should further restrict the pool of available vessels.

DryShips’ recent foray into deep water drilling adds another dimension for future cash flow. Their recent purchase of a 30.4% stake in Ocean Rig, ASA and current options to build two drillships marks their entry into the highly lucrative field of deep water oil drilling. Day rates for deep water drillships are expected to run upwards of $650k/day and major players Transocean and Diamond Offshore remain strongly bullish towards the sector.

Growth and value comparison (3/16/2008):

Company - Price - EPS 2008 - Current PE - Earnings Growth [YOY]

DryShips (DRYS) - 63.91 - 18.35 - 4.80 - 443.5%

Google (GOOG) - 458.19 - 19.91 - 34.5 - 17.0%

Research in Motion (RIMM) - 118.15 - 2.24 - 63.2 - 111.5%

Intuitive Surgical (ISRG) - 323.97 - 5.12 - 87.5 - 107.9%

First Solar (FSLR) - 220.19 - 2.48 - 108.4 - 682.2%

Baidu (BIDU) - 241.50 - 3.98 - 94.1 - 79.0%

Apple (AAPL) - 145.06 - 5.13 - 31.8 - 57.5%

Cash is King

As of 3/14/08, DryShips has available liquidity of $680 million and a net debt to capital ratio of 25%. With a peak price last year of $131.34 and a lack of significant relationship to the U.S. economy, a PE ratio of 4.8 seems a fire-sale price for this company. Conservative earnings growth estimates, based upon guidance correlated with a reasonable PE ratio of 10 to 15, would value the price per share at potentially $189 to $283. With recent consolidation in the mid $50 range, DryShips may well warrant a second look. As spoken by Warren Buffett:

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is."


http://seekingalpha.com/article/70695-bullish-on-commodities-consider-dryships?source=etrade