Why DryShips, Inc. Stock's Crash Today Should Leave You Cold

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of dry bulk shipping company, DryShips (NASDAQ: DRYS  ) sank nearly 7% this morning after the Baltic Dry Index dropped a nerve-wracking 11% to 1,706 overnight. The index is a key indicator of shipping activity, measured by the cost to transport goods through various fleet classes.

So what: After a sharp rebound in 2013, which also sent shares of dry bulk shippers soaring, the Baltic Dry Index is losing steam at a pace faster than you could imagine. After Friday's double-digit fall, the index has already shed 19% since the beginning of the year on weak sentiments backed by several factors.

One, it's a seasonally weak period for iron ore demand from China, which in turn means lower demand for vessels to ship the commodities. In fact, shares of leading iron ore mining companies too are feeling the pressure as worries about China's slowdown continue to loom large. Two, unpredictable weather in key markets, such as Australia, is also playing spoilsport.

Now what: Stifel's Ben Nolan sees further downside in the spot shipping rates as iron ore inventories in China continue to remain high. That's terrible news for DryShips, especially since the index's drop is being led by the largest and otherwise high-margin capesize ships. Spot capesize shipping rates crashed a staggering 27.5% on Friday alone, taking its total year-to-date drop to 33%. Since several of DryShips' capesize contracts are near expiry and will have to be renewed at spot rates, any further drop in rates could put the company in trouble.

DryShips is struggling with huge debt and losses, so any potential hurdle to its top-line growth is nothing but dangerous. The market applauded when the company suspended an equity offering in early December last year, but the excitement fizzled out even before the new year as DryShips resumed the offering.

Why does the situation appear bleaker today? Here's a simple equation: Contracts at low rates will mean lower revenue and greater losses, leaving DryShips high and dry with negligible free cash flow. With debt and interest payments mounting, the shipper will then have no option but to issue more shares to raise capital, and that's a double whammy for existing investors -- zero earnings growth and constant dilution of wealth.

Now that's a scary picture, and now you know why today's slump in the Baltic Dry Index should leave you scurrying for cover if you're a DryShips investor.

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

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 January 10, 2014, at 3:51 PM, groupersaurus wrote:

    That you make no mention of ORIG suggests you have done little if any real research. Not a word about tankers. Or any numbers put to the Cape resets like some of them are actually lower at DRYS now than even today's spot rates. I'd give you a "D" for this article due to poor research.

  • Report this Comment On January 10, 2014, at 4:01 PM, ricjensen wrote:

    Grouper... Agreed, all very old info. almost out-of-date. ORIG will contribute 10's million this year in Div.s, just to mention the obvious.

  • Report this Comment On January 14, 2014, at 1:01 AM, TMFBos wrote:

    @groupersaurus & ricjensen

    Dryships can't use any money's from ORIG's operations for operations of their shipping business.

    The dividend (25M in May 2014) will need to increase in subsequent quarters and capex will need to come down or shipping rates up if it's going to keep DRYS afloat with its -198M loss in the first nine months of 2013.

    DYRS today in my opinion is a highly speculative risky play on a company drowning in debt with a CEO known for his unfriendly shareholder activities. Just search related party transactions on their annual report.

    Cheers,

    Blake

  • Report this Comment On January 16, 2014, at 11:58 AM, fenili8762 wrote:

    Have bought into the Motley Fool program in the past and have never made a nickel. They have one agenda scare you into thinking you own the wrong stocks and miraculously they have all the answers on what you should buy, for a small fee. I remember one of the stocks they were pumping AOB American Oriental Bioengineering. Take a look at that dog. Motley take your circus elsewhere.

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