DryShips: Cheap Buy, Growth Darling or Value Trap?
Friday, November 23, 2007
DryShips (NASDAQ: DRYS) is down almost 40% from the all time high that it hit last month - from a fundamental standpoint the stock is starting to look pretty interesting. The stock trades at a trailing P/E of 8.6x and forward P/E at 4.4x and based on that fact that this company is growing earnings like crazy, this valuation looks enticing. According to briefing.com, there are only two active analysts following the stock, Jeffries, which has a $160 price target and Cantor Fitzgerald, which has a price target of $133, which are 66% and 100% premiums over the current $80 level.
DryShips is a shipping company and makes money by charging firms to move their stuff around the world. Unlike other shipping companies that lock in long-term contracts, DryShips relies on day to day spot market prices. This is a bet that over time the demand for shipping services will go up and that DryShips will make more by charging the market rate in the future than locking in a (still profitable) rate now. DryShips even goes so far as updating the spot market rates (called the Baltic Dry Index) every day on its website. Some people have called this the equivalent of Apple (NASDAQ: AAPL) posting a daily sales report of its iPod, iPhone and Mac sales and revenue - as a trader, what more can you ask?
Despite the fact that the BDI is still near an all-time high, DryShips has fallen off a cliff in the last month. This probably means that traders are expecting the BDI to come under heavy fire soon as well; but what if it doesn't? The market seems to be pricing in a pretty big crash in the BDI, and if the market is wrong, you'll have an extremely cheap stock making gobs of money. The extremely low P/E on shipping stocks probably speaks to the usually cyclical nature of these companies, and the question to ask is: is the cycle coming to an end? If the answer is "no" then now might be the time to start getting into stocks like DryShips.
Posted by Rob Pitingolo 5:09 PM
Labels: DryShips Inc.
