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

To: TimbaBear who wrote (24895)	9/27/2006 9:01:23 PM
From: E_K_S	Read Replies (2) \| Respond to of 78666

Hi TimbaBear - You stated "...The current metrics for DRYS are such that they are carrying too much debt and too little free cash flow for my taste. ...". (1) What do you feel is a reasonable "Free Cash Flow" ? Until they lock in their long term lease contracts, their debt will be high and free flow cash flow will be small but positive. (2)Dry's sold one of their ships (for a profit) and contracted for a two new ships in the future. DryShips gets contracts to build two drybulk vessels in China yahoo.reuters.com "... Sept 25 (Reuters) - Greece's DryShips Inc. (DRYS.O: Quote, Profile, Research) on Monday said it signed contracts to build two panamax drybulk vessels at a Chinese shipyard, each for about $33.25 million. The company also said it agreed to sell a bulk carrier for $35 million and purchase another bulk carrier for about $40.8 million. (Reporting by Devidutta Tripathy in Bangalore)..." It seems that management is building it's fleet life and is selling older ships (w/ profit) and contracting newer ships. Management's most recent move was to lease current capacity w/ longer term contracts but still needs to lock in higher rates for current future capacity. Once this is accomplished, the free flow cash flow will be excellent and positive. I guess the bet is that once shipping rates move higher AND management can lock in long term leases at these higher rates, the company can book a good ROI (even w/ the new ships on contract). If rates go south for a long time, then the strategy fails. My bet is that the daily rates stabilize or go higher so management can lock in a "fair" long term contract rate. This will guarantee a fixed ROI for the new ships on order. The kicker is that the new ships delivered may go up in value and could be sold at a higher price in the future. While you wait Dry's continues to pay a 6% dividend. Both India and China demand more ships and IMO will drive the daily shipping rates higher. Also. if inflation kicks up, the real value of the fleet assets move higher. As Drys waits for their new ships to be built, they can wait for the day rates to move higher. Based on their current contracts, they have 30% of their current fleet available for long term lease and once the new ships come online they have those too. Last month DRY's management entered into long term leases at the current "high rates" that contracted a significant amount of their excess capacity. Therefore, as rates rise further, they can slowly move into longer term contracts for the rest of their fleet (aprox 30%) which eventually will provide an excellent ROI , a positive Free Flow Cash Flow and management can make extra debt payments if it make sence. This whole strategy depends on where the daily rates run. If they go higher, management does have a plan and enough cash to pay their dividend while they wait. EKS P.S. Disclaimer, I own Drys at both higher and lower prices but believe the fundamental strategy of the management is sound. Management has been proactive and made some significant moves to position the company to take advantage of higher daily rates.