DryShips: Don’t Look for a Turnaround

DryShips (DRYS) shares have lost around 92% of their market capitalization in the past one year on account of various headwinds. In fact, it is one of the most beaten-down stocks in the industry and is currently trading near its 52-week low. Moreover, last month the company reported its second quarter results, which did not show any signs of a turnaround. Let’s see whether investors can use this significant drop to their advantage.

Persistent weakness

DryShips’ revenue last quarter fell 23.6% from the year-ago period to $403.2 million, while losses declined to $0.01 per share as compared to a loss of $2.17 per share in the same period last year.

But, earnings adjusted for special items stood at $0.06 per share, which was in line with analysts’ expectations. This positive result was mainly on account of its drilling rig and tanker segments, which performed quite well.

However, the drybulk segment continues to be in losses, which has in fact offset the strong performance from the drilling rig and tanker segments. On one hand, the EBITDA of tanker segment rose around six times on a year-over-year basis, while the drybulk segment’s EBITDA dropped around 36% as compared to last year. This is bad news for the company since it has sold its tanker segment and will deliver all the tankers to the new owners latest by the end of September.

That means from the fourth quarter its results will be totally dependent on the drybulk segment, which as we saw above is not in good shape. Moreover, CFO Ziad Nakhleh has warned that, “If drybulk charter rates especially Panamax rates continue to perform poorly, one should expect more vessel impairments in coming quarters.”

Weak end-market cues

Additionally, going forward, the market conditions don’t look promising for the drybulk segment. For instance, Chinese iron ore imports declined in the previous quarter to tune of 4% as compared to last year. Not only this, Chinese coal imports have deteriorated during the first half of the year and DryShips expects this trend to continue in the coming months.

Meanwhile, there are some positives as well, which gives us a ray of hope that things could get better. For example, iron ore production and volumes in Brazil and Australia are expected to increase from the second half of 2015 onwards. Along with this, the Chinese government is expected to take new stimulus measures to fund construction projects, which is good news for the company. Moreover, India has significantly increased its coal demand, which should be sufficient to offset some of the lost Chinese volumes.

Conclusion

The weakness in DryShips’ end markets makes the stock a risky investment. Though there are certain patches of improvements, I think that investors should not count on them to bring about a turnaround in DryShips’ fortunes. Thus, in my opinion, DryShips is a stock that investors should avoid going forward.

Published on Sep 23, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

Posted in ...