Dry bulk carrier owner DryShips (NASDAQ:DRYS) has seen its stock price effectively drop 99% over the past three years. The actual price collapse defies logic if you look at the price chart and don't understand the history -- and so far in 2019 the stock is on the downswing again, losing a troubling 40% of its value after rocketing 60% higher in 2018. What's going on, and is it worth it for investors to jump aboard this volatile ship?
The current malaise
DryShips' largest business is owning and leasing out the giant ships that move dry bulk from where it is produced to where it is needed. That dry bulk includes things like coal, iron ore, and grains. It is a service that the world needs, but it's volatile: The prices the company can charge customers are subject to economic swings, shipbuilding cycles, and even weather events that disrupt global supply and demand for the commodities it handles. In fact, investing in ship owners, in general, is not for the faint of heart. That's doubly true when you consider that leverage is a big issue in the industry, since the large ships used cost a huge amount of money to build.
The recent reversal in DryShips' stock price is a great example. The big gains in 2018 were largely driven by improving rates. Over the year, the company's average rate in its dry bulk operations, the largest segment of the business by far, increased an incredible 45%. Operating costs, meanwhile, only increased 5%. The company went from a loss of $1.13 a share in 2017 to a profit of $0.22 a share in 2018 on a revenue increase of 85%.
It's not surprising that investors were excited. But the seas shift quickly in this industry, and the big stock price decline in 2019 has been driven by a reversal of fortunes. Between the fourth quarter of 2018 and the first quarter of 2019, dry bulk rates fell nearly 30%. First-quarter rates are down 12% year over year as well. And while the company's tanker business is performing better rate-wise, it only has six tankers, compared to 19 dry bulk carriers. Clearly the more important business here has hit some notable headwinds.
But this isn't the whole story at DryShips. You need to look more closely at the 99% price decline over the past three years to understand that there is way more risk here than just shifting day rates.
The bigger picture
In 2016, DryShips was a heavily indebted company facing a cash crunch. In an effort to increase liquidity, CEO George Economou provided a cash infusion. However, the company also sold shares to an outside investor. The roughly $400 million dollars of cash was an important lifeline for the ship owner, but the company didn't focus on repairing its balance sheet -- it used the cash to buy more ships. In fact, the company's debt to equity ratio is higher today than it was at the start of 2017.
To be fair, that spending worked out well in 2018 when rates were heading higher. However, in 2019 things don't look quite as rosy. And then there's the subtle problem of that outside investor, who chose to sell the shares he had acquired on the open market. Not only was there material shareholder dilution, but the volume of shares hitting the market swamped demand. That's the reason for the stock's longer-term wipeout.
To keep the share price from falling below exchange-regulated levels, and to maintain its listing, DryShips undertook a number of reverse splits. To give you an idea of just how bad the dilution was, Motley Fool's Matthew DiLallo estimates that, taken together, all of the splits would have amounted to a single 1-for-7,840 reverse stock split. That's an insane number that speaks volumes about management's decisions during a crisis. Yes, it managed to keep the company out of bankruptcy court, but it basically wiped out stock investors anyway.
DryShips is trying to do something about the problem by buying up shares. But with so much dilution, there's only so much the company can do over the short term on this front. Meanwhile, with the industry turning lower again, finding the cash for repurchases could become increasingly hard as well. To give you some numbers here, the average share count in the first quarter of 2019 was roughly 87 million shares, down from almost 104 million in the first quarter of 2018. However, the average share count in 2017 was just 35 million shares. DryShips still has a lot of work to do before it resolves the dilution issue, and the current shipping market isn't helping.
Just not worth it
Even if DryShips were the only public company providing exposure to the dry bulk space, it would be tough to suggest that investors buy the stock. It faces issues that go well beyond the often volatile market it serves. And since it isn't the only publicly traded dry bulk operator, it is in fact fairly easy to suggest that investors are better off avoiding DryShips. There are simply better options in the space if you want exposure to dry bulk operators.