There seems to be no end to DryShips’ (DRYS, Financial) despair even as it reported its fourth-quarter results with earnings that came in below the street expectations. Consequently the stock continues to plunge, heading towards its all-time lows. As a matter of fact, since the economic recession in 2008 the stock tanked more than 95% and never returned to its former glory. Although the company is taking various initiatives to turn its situation around, it will be a matter of time to see how things work out for DryShips.
Looking past the improvements
On a year-over-year basis the company did make some progress in its operating income, which rose 66.9% to $138.5 million. It is quite encouraging to see such a significant rise in its profits, but at the same time operating expenses also increased 32% from last year. Even if we adjust for the impairment charges on its vessel, these expenses have increased drastically on account of higher drilling cost and elevated depreciation and amortization charges.
During the quarter, DryShips benefited from the increased activity in its drilling rig segment coupled with its tanker segment. These segments will continue to improve its financials in the days to come. Moreover, as the charter rates are improving at 200,000 per day, it will add another $250 million of additional EBITDA to its shipping segments in 2015. Also, there has been a marginal improvement in its debt compared to last year.
The way ahead
Going forward, DryShips anticipates higher orders from various places on the back of increased export/import activities, which will be translated into its bottom line. During the quarter, Brazil and Australia’s combined iron ore exports were up around 11%, while Chinese iron ore inputs increased around 7.8% year over year. But China’s coal imports declined approximately 40% compared to last year, which came as a surprise for the company. The management is betting on lower commodity prices coupled with the plans of Chinese government to invest heavily in infrastructure to boost growth. It may result in additional demand, driving overall seaborne trade and utilization.
It is important to consider these numbers, since iron ore and coal shipments contribute around 34% of dry bulk ton miles. Especially the Chinese transportation demand will be a key metric to watch, because if the cargoes are sourced from afar then the overall demand for Capesize vessels will increase along with a lift in freight rates for smaller asset classes.
Moreover, the management cites that there is considerable scrapping potential as many of its fleets are 15 to 20 years old. Coupled with the depressed freight environment, it should boost demolition activity going forward. DryShips also expect the slippage, which ended at approximately 36% in 2014, to continue in the next fiscal as well, on account of a negative freight outlook. Additionally, the lack of financing new building projects are being postponed or cancelled providing some respite to the substantial drybulk order book.
Conclusion
With these efforts it is trying to put the company back on its growth trajectory. Currently it does not have any trailing P/E because of its year-over-year loss, but its forward P/E looks impressive at 10.33. In spite of all these initiatives it is quite difficult to say whether its stock has touched bottom. DryShips’ shares have been falling consistently throughout the year and slipped below the $1 level, which marks the beginning of new lows in its history, which is quite disappointing. Therefore, in the light of these facts it seems prudent for investors to wait on the side lines and look for a strong turnaround before venturing into DryShips.
