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DRYS; unstoppable cannon against unmovable wall?

May 20th, 2008 · No Comments

We have written quite a bit about our favourite dry-bulk shipper DRYS, they had earnings out after the close, and they were rather good.

Some highlights:

  • Earnings beat consensus by 8c, to earn a whopping $4.13 per share (that’s per quarter, if you wondered, although most companies trading at a little over $100 would be glad to have those earnings in a year)
  • including one-off items (the sale of a ship), earnings were even better at $4.61
  • Revenues also handily beat estimates, they rose 167.8% year on year to $232.1M vs the $218.6M consensus
  • There mentioned already spinning-off within a year the Norwegian deep ocean drilling company they have only just acquired. We assume they mean listing part of it on the American markets so that this division can be separately valued. In that is indeed the case, it’s a very good idea, this sector is in the early stages of a structural upswing, and valuing it separately could give DRYS, which is very dependent on those daily spot rates for dry-bulk shipping some visible stability
  • Speaking about those spot rates, CEO George Economou was very bullish on them for the rest of the year. These rates are already at record rates and closing in on $300.000 per day. Lets put that in perspective:
  • The company reported an average number of vessels operated of 38.3 at an average day rate of $63,127. So imagine this, they earn $4+ a share in a quarter, but now rates are almost 4 times as high!
  • It’s not quite as good as it might seem as the $63K rate is an average for the quarter, but still..
  • A year ago in the same quarter, average rate were $28,930. Speaking about exponential growth..
  • Not only are rates higher (way higher), they also have more ships busy; the average number of ships busy rose from 32.1 to 38.3
  • As of March 31, 2008, the Company had total cash and cash equivalents of $671.0 million. Wow. This provides plenty of ammo for more ships, acquisitions, dividend (they pay a rather measly 20 cent), whatever.

Now, what to do? We advised to buy at $75 and have twice argued to lighten up (at $85 and $94), for two reasons:

  • on both occasions it was technically overbought
  • it’s VERY dependent on those very volatile dry-bulk spot day rates, and our thesis was that this was vulnerable in a weakening global economy.

Let’s revisit those reasons, first the technical picture. Guess what, it’s still overbought:

It’s likely that there will be some profit taking (there already was a good deal yesterday), but we have a feeling that we might well be wrong on our second thesis.

We first surmised so a couple of days ago in another update. It’s possible that the market is so buoyant because of temporary factors (like the Chinese earthquake), but capacity remains very tight, as a leading London-based capesize broker told Lloyd’s List:

“Owners can virtually name their price and it gets done, and then the next owner names their price, but only higher. These are massive numbers beyond anybody’s imagination, it’s absolutely incredible.”

We also reported that the credit crisis is probably a significant boon to the sector, as it has financing new shipping more difficult.

We still expect profit taking and a little cooling off, but not for long. This company is firing out of all cylinders.

Tags: DRYS