Buy, Sell, or Hold: DryShips

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at DryShips (Nasdaq: DRYS  ) today, and see why you might want to buy, sell, or hold it.

Founded in 2004 and based in Greece, DryShips is in the business of ferrying stuff across water, via 46 drybulk carriers and 12 tankers. Its Ocean Rig UDW (Nasdaq: ORIG  ) subsidiary operates several ultra-deepwater drilling rigs and drillships.

The company is not without promise, but over the past year its shares have shed 13%, and over the past five years, they've averaged an annual loss of more than 50%. Yikes.

Buy
One reason to buy into the company is its primary business. It might be cyclical, tied to the prevailing economic conditions, but companies around the world will always need their goods moved around. And the oceans are likely to remain in the way, frequently needing to be crossed. It's been a tough few years, but DryShips has posted some solid revenue growth -- check out how it stacks up against its peers:

Company 3-Year-Avg. Annual Growth 5-Year-Avg. Annual Growth
DryShips 9.2% 16.7%
Frontline (NYSE: FRO  ) (19.0%) (13.4%)
Diana Shipping (2.3%) 6.0%
Nordic American Tanker (NYSE: NAT  ) (13.7%) (14.7%)

Data: Motley Fool CAPS

You might also be bullish on its other business, that of deepwater drilling, since our planet doesn't look like it will be doing without oil any time soon. That's reasonable, but know that DryShips has been selling off some of its stake in the drilling business -- partly to pay down debt. Its deepwater drilling business has competition, too, from the likes of Seadrill (Nasdaq: SDRL  ) , which is well-regarded for its fleet that is in high demand. Still, Ocean Rig recently had $2.6 billion in contract backlog, which bodes well.

Sell
One reason to sell, or not buy, DryShips is if you don't have the stomach for volatility. The stock's beta is a hefty 2.4, meaning that it has been, on average, about 2.4 times more volatile than the overall market. If the market rises or falls by 10%, then we might expect DryShips to rise or fall by 24%. And in the past few years, even as the market has grown, DryShips has fallen. Ouch.

Another concern is the nation where the company is based: Greece. You might recall that it hasn't been a paragon of financial fortitude lately, and DryShips has been whacked due in part to its association with Greece.

Then there's simple macroeconomics. Ever since the great financial crisis a few years back, which helped mire the world's economies in a some quicksand, the shipping industry has struggled. Part of the problem has been oversupply, or overcapacity, which can lead to low prices as rivals compete for business.

Management quality is another concern, as CEO George Economou has his detractors. One colleague increasingly likes Ocean Rig UDW the more DryShips sells off shares, as it distances the company from Economou. One thing management has been doing right, though, is not locking the company into low rates for the long term. Instead, it has been remaining underutilized, waiting for an industry turnaround.

Stock dilution is another problem. The shares outstanding have gone from about 36 million at the end of 2007 to 373 million recently. The more shares there are, the lower the portion of the company each one represents.

Why might a company issue more shares? Well, to generate cash in order to pay down debt. DryShips has seen its long-term debt surge from a little more than $1 billion at the end of 2007 to nearly $4 billion at the end of 2011, with debt nearly doubling between 2010 and 2011. The company's cash? It was just $251 million at the end of 2011. (Free cash flow has been negative over the past few years, as well.)

Hold (off)
Given the reasons to buy or sell DryShips, it's not unreasonable to decide to just hold off. You might want to wait, for example, for the shipping industry to start firing on more cylinders, or for DryShips to pay down a lot more debt, or to post a few quarters of strong profits.

You might look instead at some of DryShips rivals, such as Navios Maritime, which, while also carrying a lot of debt, also pays a dividend and sports some stronger numbers.

The verdict
I'm not buying shares of DryShips any time soon. (I do own a few shares of Seadrill.) It may perform spectacularly in the coming years, but there are plenty of other compelling stocks out there. Everyone's investment calculations are different, so, do your own digging and see what you think.

For more on one of my favorite energy stocks, Seadrill, check out our premium report on the stock. It gives background on the company and highlights the three areas investors must watch. It also comes with a year of updates on the company, so find out more by clicking here.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Seadrill, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Seadrill. Motley Fool newsletter services have recommended buying shares of Seadrill. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 28, 2012, at 12:46 PM, imacg5 wrote:

    """One colleague increasingly likes Ocean Rig UDW the more DryShips sells off shares, as it distances the company from Economou."""

    Well, your colleague needs to do his homework.

    George increased his ownership of ORIG when DRYS sold off those shares.

    And Georges company manages all activities of ORIG, and will always have an iron grip on the company. Just look at the poison pill.

    ""One thing management has been doing right, though, is not locking the company into low rates for the long term. Instead, it has been remaining underutilized, waiting for an industry turnaround.""

    Again your colleagues are wrong. First, utilization rate in the shipping business always refers to the percentage that the ship is employed, and DRYS has a rate of 99.4%. However, the percentage of ships locked into LT charters for 2013 is 44%.

    And the choice to put the 15 Panamax on spot charters was a horrible choice, it wasn't the "one thing they are doing right".

    Spot charters are now below break even, and are expected to get worse next year.

    While DSX has been signing their Panamax to two year deals for above break even.

  • Report this Comment On October 17, 2012, at 8:44 PM, NickD wrote:

    DRYS $2.38 a share buy now

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