Nothing Scary About DryShips' Profits

I've said before that I think bulk commodity shipper DryShips (Nasdaq: DRYS) lacks investment merit. But do I consider it the world's scariest stock? Not at all.

While dry bulk shippers like DryShips, Diana Shipping (NYSE: DSX), and Excel Maritime (NYSE: EXM) face great fluctuations, they're quite transparent ones. Spot market indices are listed on DryShips' own website, and they're updated every single day. That's akin to Apple (Nasdaq: AAPL) posting a running tally of how many iPhones it's sold to date, or Wal-Mart (NYSE: WMT) announcing its daily store traffic.

Even though tomorrow's rates are uncertain, you don't have to take blind faith in DryShips' performance between earnings reports. DryShips' fleet is about 70% Panamax by tonnage, so the Baltic Panamax Index, shown in this chart, isn't a bad proxy. A quick glance at those rising Panamax rates should help you visualize the cash bash that DryShips enjoyed in its third quarter.

A few figures help round out the picture. Shipping rates were up almost 120% year over year, while the total cost of daily voyages rose 19%. Factor in a slightly bulked-up fleet, net of some lucrative vessel sales, and you're looking at a more than sixfold rise in operating income, and about 13.5 times the net income.

I've been a bit bothered by DryShips' gains on ship-flipping in the recent past. These sales accounted for 32% of total EBITDA in the first quarter, and 38% in the second. This time around, vessel sales finally retreated to the background, amounting to a far smaller portion of the profit pile.

Maybe it's just part of doing business, but the vessel sales really make a big impact on DryShips' valuation. Exclude them, and the enterprise is valued at a pretty rich 14 times EBITDA. Including the asset disposals brings that multiple down to a more reasonable 11.

Of course, all this may be irrelevant. If Chinese demand for iron ore and coal keeps up in 2008, DryShips will look cheap in retrospect, any way you slice it.