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.
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.
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."