This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

DryShips torpedoed
There's no two ways about it: DryShips (Nasdaq: DRYS  ) had a rough time of things last week. On Wednesday, the dry bulk shipper announced a quarterly loss of $0.13 per share for Q3, several times worse than the $0.02 loss Wall Street had braced itself for. Revenues from the firm's Ocean Rig (Nasdaq: ORIG  ) unit helped out a bit, but not enough to avoid DryShips running aground on a revenue miss  as well.

Indeed, Ocean Rig's revenue contribution turned out to be quite a mixed blessing for DryShips. Analysts at Wells Fargo voiced concerns  over DryShips' needing to pledge 7.8 million shares of Ocean Rig to secure its loan agreements. Global Hunter Securities was even more worried, citing "significant drilling rig expenses" at the subsidiary as contributing to worries about future earnings power, and warning further that DryShips' better-paying "legacy dry bulk charters" are starting to expire, raising the specter of renewal at lower (i.e. less profitable) rates. These concerns prompted Global Hunter to downgrade  the shares from "buy" to "neutral." Was it right to do so?

The big picture
A few months back, my fellow Fool Travis Hoium dug into this issue in a column describing the difficulties of dry shippers in general. You can read the whole article here, but the upshot is that dry bulk shipping rates have been sinking like a proverbial stone since as far back as mid-2010. Between the costs of building, buying, and fueling ships on the one hand, and low rates for hauling cargo on them on the other, this has left "little in the way of profits for ship owners" such as Eagle Bulk Shipping (Nasdaq: EGLE  ) , Excel Maritime (NYSE: EXM  ) , Genco (NYSE: GNK  ) ... and DryShips.

To a man, these merchantmen are all losing money and weighed down with debt -- well over a billion dollars apiece, and with minimal cash available to pay it down. And DryShips is arguably the worst-off of the bunch, with a debt load approaching $4.5 billion -- three times worse than the worst-debt-laden of its peers.

Adding to DryShips' difficulties, it's the only ship in this fleet that -- in addition to being unprofitable and hauling a boatload of IOUs -- is currently sinking deeper into debt by burning cash. Rival Genco, while hardly the model of health, is nearly back to free cash flow-breakeven  today. Eagle Bulk is already there , while Excel Maritime -- the relative winner in this race -- generated a downright respectable  $37 million in cash profits over the past year.

Foolish takeaway
Given the company's difficulties, I can't say at I disagree with Global Hunter's decision to downgrade DryShips today. (To the contrary, I'd suggest this is a decision Global Hunter should have made years ago).

While some analysts believe the company can return to GAAP profitability next year, the real question is whether DryShips can figure out a way to generate cash from its business. Because the fact remains: A company in debt, generating no cash to pay down that debt, ultimately has only one direction to go. And that direction is not "up."

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Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

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 November 17, 2012, at 3:51 PM, Ostrowsr wrote:

    And yet DRYS is rated 3 stars just like AAPL. Anybody else see anything wrong with this rating system?

  • Report this Comment On November 20, 2012, at 11:46 PM, curious333 wrote:

    I keep reading that dry bulk rates keep falling. This may be a silly question, but if they get too low and all these shippers are not profitable carrying them, or can't afford to, who is going to actually transport anything "dry bulk" over seas? It's not like you can use a train. Why prices are staying at a low unprofitable rate?

  • Report this Comment On December 04, 2012, at 5:49 AM, imacg5 wrote:

    curious333

    Rates are low because of a massive overbuild of ships that has been taking place over the last 5 years.

    The quantity of goods being shipped is at a record high, those people who are awaiting a resurgence in world trade, must realize that as far as raw materials, it's already here.

    What happens when rates are below break even, is that some older ships are scrapped, some are "laid up".

    Several times a year, there is a brief flurry of activity for each ship size, that brings the BDI above 1000, leading many to believe that the recovery is coming. But it is merely a matter of there not being enough available ships in a certain area, at a certain time.

    It is estimated that there are currently 30% more ships available for trade than the amount that is needed. And getting worse.

    Scrapping is at an all time high, however, three times as many ships were launched this year and last, as have been demolished.

    Ship owners are just getting by with allowances from their creditors. Management wants to keep the game going, because commissions are being paid to a privately held company owned by the CEO.

    Shareholders will be left out in the cold.

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