DryShip Trade Recommendation, courtesy of Daniel Jones, of Options Notions.
Last week was pretty good for the markets as we continued our climb off the mid-July lows. We like to think that the reduction in oil prices is due to a welcome combination of factors: a stronger US dollar and a change in behavior on the part of the consumer. I know I, for one, have been milking my tanks of gas – the record this summer is two weeks without a fill-up – but there’s only so long that warm weather will allow me to bike before I’ll resort to the four-wheel method of transportation again. Of course, I could keep a home office and never leave…
This week’s pick is a really interesting drybulk shipping company. We’ve seen some results from a couple of the other dry bulk shippers in recent weeks, and they’ve been very strong. We think this company deserves an option recommendation for its upcoming (late August) earnings event. It could be a very nice catalyst. Try hard not to fall in love with the fundamentals of this company; they are extremely compelling. The size of the float on the shares is so small that they are vulnerable to all sorts of intra-day volatility.
Please read on to today’s recommendation!
The chart above shows Dry Ships stock (DRYS) for the last six months. The stock has been all over, from the mid-$50s to over $115, but has now settled in the mid $60s. With this kind of volatility, we see opportunity in the covered calls on this name, especially given that earnings are coming up and there is an earnings vol component to the options.
The Relative Strength Index (RSI) and Moving Average Convergence/Divergence (MACD) stochastic lines are both grinding sideways.
DRYS Fundamental Data
Current Price: $67.89
Shares Outstanding: 41.4 million
Market Cap: $2.8 billion
Forward Price / Earnings (avg. Est): 4.7x
PEG Ratio (5 Year Expected): 0.05x
Price / Book: 1.8x
Dry Ships, Inc (Symbol: DRYS) engages in the ownership and operation of dry bulk carriers worldwide. The company’s fleet carries various dry bulk commodities, including coal, iron ore, grains, bauxite, phosphate, fertilizers, and steel products. As of 14 March 2008, it owned and operated a fleet of 46 dry bulk carriers comprising 5 Capesize, 31 Panamax, 2 Supramax, and
8 newbuilding dry bulk vessels with a combined deadweight of 4 million tons. The company was founded in 2004 with headquarters in Athens, Greece.
The published 2Q08 annual earnings estimates for DRYS are averaging $4.70 per share right now – and yes, that’s a quarterly figure! The market for dry bulk shippers is very tight, and rental rates for the ships are very strong. Capacity utilization is also very strong in the industry right now, and the most recent shippers to publish results have seen 99% utilization rates as the norm. Additional capacity in the shipping market is coming on in the near future, which may drive rates for these ships down somewhat, but the outlook is still strong, especially given the price of DRYS shares right now.
For the full year ending in December 2008, DRYS is expected to earn over $19.11 per share according to estimates – again, that’s $19 a share, and yes, you read that right. That will be on revenues of over $1 billion, an 81% increase over last year’s $582 million full year revenue figure. For FY2009, the company is expected to see revenues of just over $1 billion again (suggesting perhaps a leveling off in revenue, but offset by a bigger fleet) but earnings are "only" expected to be around $14.50 per share. On a $70 stock, that’s pretty decent, in our conservative opinion.
The balance sheet of DRYS is well kept, with $624 million in cash offset by only $1.3 billion in debt. There is an interesting short position in these shares, with 6 million shares short against a 28 million share float. As previously mentioned, this may drive some inter-day and intra-day volatility in these shares.
Our recommendation this week is to buy DRYS shares at $68.80 and write September 75 calls against the shares. The September 75 calls are presently bid at $4.20 per contract, giving us a "static return’ if the shares are not called away off $4.20 /$68.80, or 6% for a one-month (five weeks anyway) period. If the shares are called away at $75, this will give investors a five week return of 15%, including the capital gain on DRYS shares.
Disclosure: Analyst has no position in DRYS stock or DRYS options.
