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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Ray Rueb who wrote (21841)	8/3/2005 5:00:46 PM
From: E_K_S	Read Replies (1) \| Respond to of 78669

Hi Ray - I like Drys from the stand point of their long term business plan (shipping transportation specifically to/from China & India) and their potential to generate huge cash flows from their operation. DRYS is currently a leveraged play where the company has used the equity from their recent IPO to double the size of their fleet w/ limited amounts of new debt. As a result, their 2nd quarter revenues doubled and their per share earnings (adjusted for the new IPO shares) came in today at $1.43/share. This beat the analyst estimates of $1.23/share but more importantly demonstrated how huge cash flows can be generated by incrementally increasing their fleet size. More ships are scheduled to come on-line in the next 12 months. DryShips Inc. Reports Second Quarter 2005 and First Half Results Tuesday August 2, 4:15 pm ET (http://biz.yahoo.com/iw/050802/092229.html) It is a leveraged play as a large amount of the cash generated goes to pay down the new debt used to buy the used ships but after 24 to 36 months, most of this new debt will be paid down. I see it as a "value" play in that the company buys used ships for $0.50 on the dollar (they do hire that "sister company you mentioned to manage their fleet and pay a high "service fee" to compensate the group for the day-to-day operations). There are incentives built into their operating contract so they run an efficient fleet. They utilize both long term fleet pricing contracts and day rate fees. The key is to keep all the ships in use and minimize the down time. I like this "value" play because the operation has physical assets (used ships) that generate consistent cash flows, where industry demand is expected to grow annually at 10% or better due to global demand constraints. The value proposition (IMO) is if they can extend the operating life of each "used" ship from 4 years to 7 or even 10 years. I believe the average age of the fleet is just under 10 years and many of these ships have a useful life of 18-22 years depending on the type of maintenance done. Therefore, if they can stretch the average useful life by 1 to 3 years, their free flow cash flows will more than double. These huge free flow cash flows go directly to the bottom line because much of the debt was paid off in the first 36 month's of ownership. Also, you will notice that the salvage value for all these ships have gone up over time too because the basic commodity "scrap" prices are higher. I continue to accumulate shares at the current level and believe the stock is worth around $25-$30/share which equates to a forward PE of 5. The company recently implemented a quarterly dividend of $0.20 share or $0.80/share annual or just over $5% return. This is a qualified dividend too. If you look at the payback period, cash flows and other ROI measures for similar assets like truck fleets, planes and even rental property, this is a pretty good business to own. My analysis shows that on average each used ship is paid off in under 48 months. Finally, some insiders in the business say that the CEO is very smart and now that he has a vested interest in the new IPO shares (and probably options too), will do his best to grow the company and will continue to buy "used" ships on the cheap. I just do not see this being a $5/stock unless it is mismanaged, ships become idle, and some catastrophic event hits the company. EKS