Dryships: Undervalued Compared to Competitors - and the Market

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

18 Mar 2008

In my last article, I pointed out how Dryships (DRYS) has been panned by the investment community despite a low PE and formidable earnings and revenue growth. To recap, Dryships is a shipping company that hauls commodities such as iron, coal, and fertilizers around the world. It reached a high of 87 less than a month ago but has been dropping quickly to 60 as of March 14 even as the money that shippers receive to charter their vessels has been robust. The company has been criticized because:   1. Its CEO George Economou uses his privately owned companies (Cardiff) service Dryships' vessels, something which worries investors about conflict of interest.   2. The company recently invested in a drill ship company, Ocean Rig, a move out of its traditional drybulk sector (one I believe will add value leasing expensive deep water oil rigs. These rigs lease at 650,000 a day!)   3. Recently, Dryships did a large secondary of 6 million shares, increasing its share count to 42 million. The proceeds will be used to pay down debt and improve its balance sheet. (Dryships has been in a period of huge expansion in its fleet). Low share prices of DRYS reflect the Street's concerns about management, which I think are overblown. Management has delivered stellar financial results. For instance, earnings 2007 rose 659%.What is particularly reassuring about management's abilities is the low expenses involved in producing those remarkable earnings. Their costs are lower than their competitors. Their use of Cardiff for ship maintenance appears to enhance their earnings. Comparing Dryships to others in the industry, we find a very low PE - DRYS 4.5, Genco (GNK) 13.8, Eagle (EGLE) 19, Diana (DSX) 11.59.Below is a chart looking at these four companies' revenues, expenses, and interest payments. I've left off gains made selling vessels (which would have helped Dryships) and depreciation expenses. Of note, taxes do not play a role here as Dryships pay no taxes (another remarkable plus for Drys and most of its drybulking cohort).As you can see, Dryships' expense/revenue is extremely favorable at 21%, a testimony to management. Once interest cost has been taken into account, their 79% Net-Interest/Revenue easily bests their competitors.Bottom line: Dryships is undervalued compared to its competitors and the market in general.