BETTING ON AN ECONOMIC RECOVERY?? CONSIDER DRYSHIPS

Type of Play: Speculative: Turnaround Play

Dry Ships (NASDAQ: DRYS) has lost almost 97% of its value since the beginning of the economic crisis of 2008. Can the smart contrarian find an end to the plunder in this stock and the shipping sector as a whole? Everybody loves a good turnaround play. There is nothing more pleasurable than seeing a company through its obstacles and getting rewarded very handsomely for it.

The company engages in the ownership and operation of drybulk carriers and drilling rigs that operate worldwide. Investors have been fleeing Dryships due to its heavy debt load, a slowdown in offshore drilling due to the spill in the gulf and a reduction in shipping prices due to an oversupply of ships.

We think that assuming an economic recovery and increasing demand from emerging markets we can make a strong bullish case for the shipping industry. This article will go through a fundamental analysis of the company as well as a technical analysis right below to ensure we can find the right time to get in.

Let us go through our top 2 Fundamental reasons for pursuing DryShips:

1. Improvement in the Industry 

The Baltic Dry Index¹ which tracks worldwide international shipping prices of various dry bulk cargoes is at a historically low level.  The reason behind this trend was due to the shipping industries lack of foresight: adding to their fleet at the height of the economic boom. So the result is that the shippers have drastically reduced their prices to ensure there very pricey ships don’t stay idle. There will definitely be a reversal in this trend once more volume comes on line.

In fact if we compare the Baltic dry Index to major commodities we see that shipping prices are lagging overall commodity prices Please see the diagram below

In this Diagram: Baltic Dry Index vs Copper

As can be seen from the graphs above the Baltic dry Index is lagging major commodity prices and we should see a convergence in the prices.

We definitely see resurgence in global demand. The latest china PMI is a definite indication of that with the number been at its highest level in four months.

1. Improvement in Company Fundamentals.

The company prospects are certainly turning; Dryships was recently awarded a $135 million contract to explore the West African Coastline for a year. Moreover analysts have a $7-$8 price target which could definitely be raised if they are awarded more contracts. Doing a more thorough analysis of its financials I discovered a few more things;

-          Sales Growth is up 6.2% last quarter.

-          Net Income is up 33% since last quarter and entering the busiest quarter of the year for the shipping industry we expect this number to be better this quarter.

-          Cash flow per share is $0.66 on December 2009 up from $-2.65 per share on December 2008. It is clear that increased profitability is helping the company increase its liquidity.

The elephant in the room is definitely Dryships debt. Dryships debt load, around billion, is staying relatively stable in light of increased sales. It should be able to ease this debt load with its increased profitability and liquidity




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