Can Stimulus Save This Sinking Ship?
Sep 20th 2012 12:50PM
Updated Sep 20th 2012 12:54PM
Few companies are as beaten down as beleaguered dry bulk shipper DryShips (NYS: DRYS) . After its stock imploded following the recession in dipping from over $100 to single digits, the Greece-headquartered company has struggled to find any footing in a floundering shipping industry.
September has given DryShips a measure of hope, however -- central bank action from Europe along with renewed infrastructure spending in China could finally drag this industry out of its trough. We'll take a look at how DryShips stacks up should an industry turnaround come; but first, let's see how global forces are making a mark on shipping.
Macro forces on the move
A German court's decision to save the euro effectively let shippers breathe a major sigh of relief earlier this month. Europe certainly hasn't done its part to help the global economy recover from recession. Still, with a clearer plan in place to launch financial rescue measures for the European Union's staggering debt crisis, DryShips and other shippers can have confidence in some stability for the region's economy -- at least more confidence than Europe's deserved since the recession hit.
European energy needs rely heavily on coal, a major product transported by shippers. The rise of coal consumption in 2011 in the region -- 3.3% above 2010 levels -- should provide a boost to DryShips and its peers if the European bond-buying measures end up stimulating any spark of economic growth. With natural gas still somewhat pricey in Europe as an alternative energy, coal remains a cheap option that should continue as a staple for shippers servicing any European recovery.
The U.S. stimulus incentive brought to bear by the announcement of a third round of quantitative easing won't be such a nice measure for shippers. A weakening of the dollar due to easing's open spigot of money will only lift commodity prices higher, including prices of oil fuel necessary for shippers to do business. Increasing fuel costs will cut down on these companies' margins and force them into an even tougher spot as the industry tries to recover. Furthermore, rising commodity prices could persuade customers to cut back on purchasing, reducing shipping volume as orders wane.
In such a scenario, DryShips and its industry rivals will have to look to China for help. China has drawn on reserves and inventories in steel this year, depressing the price of iron ore as growth in the Asian nation slowed; however, a $280 billion infrastructure commitment should spark renewed demand in iron. Although you should be wary about considerable steel supply still on hand in China, an uptick in demand won't hurt iron exports to the world's second-largest country. Shippers should see a boost from infrastructure needs as China ramps up development.
However, given DryShips' woes during recent years, will this company be the one to capitalize on these trends?
Stuck in a whirlpool
DryShips' fall has mirrored that of the Baltic Dry Index, the chart that tracks the cost of shipping dry goods that has plummeted since the recession and retreated near to post-recession lows earlier this year. Although the company's stock price has risen in September, DryShips still hasn't sailed anywhere near safe waters.
The company is heavily laden with more than $4 billion of debt, totaling a debt-to-equity ratio of nearly 108%. Although, around $2.7 billion of that debt belongs to DryShips' drilling subsidiary Ocean Rig UDW (NAS: ORIG) , that same subsidiary arguably has performed better than its parent company. In the first sixth months of 2012, DryShips' offshore drilling segment -- a division serviced heavily by Ocean Rig -- reported revenues of $426.5 million, more than two-thirds of total company revenue.
That's a hefty risk for investors with the company's revenues so concentrated away from its core dry bulk business. While its bulk shipping segment did record lower year-over-year operating losses in those six months, the company attributes most of that decrease to lower dry docking costs -- a variable that can't be taken for granted to continue in future quarters.
But, if you want to get into a business that services offshore drilling like DryShips' top sales segment, why not choose the best in that sector? With demand for deepwater drilling high, a dedicated, strong company like Seadrill (NYS: SDRL) sports a top-notch profit margin of 20.4% that crushes DryShips' net margin of -3.9% (and subsidiary Ocean Rig's 4%). Seadrill also offers an outstanding dividend of 8.3%. While investors have questioned whether or not that dividend will be cut, compare that to DryShips and Ocean Rig -- neither of which offers a dividend at all.
Even in the dry bulk carrier industry, a company such as Navios Maritime (NYS: NM) offers far better security and stability to weather the shaky economic climate. Navios is heavily debt-laden -- even more than DryShips -- but does offer a 6.5% dividend and has a strong track record of paying that high dividend straight through the worst of the recession. Navios beats DryShips on numerous financial metrics, all while trading at a similar price-to-book value (a 0.38 valuation against DryShips' 0.34).
Only for the optimists
In all, DryShips sports far too little strength to recommend the stock for your portfolio. At best, investors optimistic in China's continued growth, a successful European bond-buying measure, and stable commodity prices could take a reach on the company in a turnaround play. Still, with far better offerings in the dry bulk shipping industry alone, whether from Navios Maritime or another viable contender, avoid DryShips' unnecessary risk.
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The article Can Stimulus Save This Sinking Ship? originally appeared on Fool.com.Fool contributor Dan Carroll holds no positions in the stocks mentioned in this article. The Motley Fool owns shares of Seadrill. Motley Fool newsletter services have recommended buying shares of Seadrill. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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