DryShips Inc. (DRYS) stock is up more than 40% over the past year. That showing trounces many of its shipping peers. The stock's solid run has been driven in part by improving financial performance. However, even a year from now, there's going to be one thing DryShips can't change. Here's what that is and what it means for investors.
Things are looking better
DryShips lost $0.85 a share in 2017, but it's on pace to be solidly in the black in 2018. Through the first nine months of the year, the shipping concern had earned roughly $0.16 per share. From that perspective, you can understand why investors have rewarded the stock with a higher price.
Driving that earnings improvement was underlying strength in the company's two largest divisions. The rates DryShips was able to charge in its bulk shipping group, for example, were more than 60% higher year over year through the first nine months of 2018. Rates were more than 65% higher in the tanker business. These two businesses accounted for roughly 75% of the company's total revenue over the span. And while rates were roughly flat in the company's gas carrier fleet, it added new ships and was able to increase revenue in the division from around $3.3 million to over $31 million.
DryShips has clearly benefited from an upturn in the shipping business and from the expansion and diversification of its fleet. On the surface, there's a lot to like, here, and it makes sense that the stock has done quite well over the past year.
A bigger-picture view
However, you need to pull back a little more to see the full picture with DryShips. Go back three years, and suddenly the stock has lost virtually all of its value. The upturn over the past year is coming off of a near-total collapse in the stock price. That changes things in a big way, and one key cause of that decline isn't going away soon. That's true even if the company continues to benefit from improved shipping rates over the next year, which is far from a given in the highly cyclical and economically driven shipping business.
The truth is that it doesn't really matter what happens to shipping rates from here -- DryShips isn't worth owning for most investors. The important story goes back to 2016, when the then-heavily indebted company was facing a cash crunch. CEO George Economou provided a cash infusion. It also sold shares to a third-party investor. All in, it had access to as much as $400 million dollars.
Instead of paying down debt, though, the company started to expand its fleet. The growth in revenue in the natural gas business noted above is one of the big outcomes of this spending. However, DryShips was buying more than just gas carriers. It turns out the heavy spending in 2017 on fleet growth was well timed, with rates picking up in 2018.
But the damage from the "fix" was severe, which is demonstrated by the material drop in the stock price over the trailing-three-year period. A big part of the problem was the stock sale to the third-party investor, who, as it turns out, sold the stock on the open market. All of the new shares caused massive shareholder dilution. And when the shares hit the market, the stock plummeted. To keep the stock price from dropping below exchange minimums, DryShips had to do a number of reverse stock splits...a very large number of reverse stocks splits. Taken together, The Motley Fool's Matthew DiLallo estimates they would have amounted to a single 1-for-7,840 reverse stock split.
That's an almost unbelievable number. Doubly so when you consider that all of those reverse splits were undertaken in just about a year or so. When you step back, it looks like DryShips basically wiped out investors to save the company. The stock advance over the last year was simply a bounce off of a very low base and a reward for, effectively, not flaming out.
Management has been buying back shares lately to help sop up the mess from the massive dilution. But that won't change one very important thing: Shareholders do not appear to be top of mind at DryShips. In fact, the company recently bought some ships from its CEO. That's a related party transaction that a company with this history should probably have thought twice about.
One year, three years, five years...it doesn't matter
Where will DryShips be in a year? Where will it be in three or five years? Financially, a lot will depend on the highly cyclical shipping industry. But none of that should matter to investors. DryShips' checkered past when it comes to putting shareholders first is the bigger issue. And one year, or three or five, isn't likely to change the fact that shareholders appear to be second-class citizens, here. Essentially, it is hard to trust that DryShips will do the right thing by investors, and for that reason, it isn't worth owning over any time period.
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