DryShips Looks Too Good to Pass By

Since I wrote about the dry-bulk shipping sector a couple of weeks ago, the overall industry has tanked along with the historic 25% weekly decline in the Dow. In fact, commodity stocks have been hit far harder, and most dry-bulk shippers are down an additional 50% to 60% in two weeks. We are now reaching valuations where the parts are vastly worth more than the whole.

One particular business, DryShips(DRYS Quote - Cramer on DRYS - Stock Picks), is particularly intriguing, because the company plans to spin off an ultra-deep-water business that could command a share price in excess of the current stock price today, meaning you would get one of the largest dry-bulk shipping fleets for free.

Even more intriguing, the current market value is now at levels where a liquidation sale of the shipping fleet would easily exceed such value. This valuation is happening only because massive amounts of distressed selling, along with a shutdown of inter-bank lending, has sent equity prices to the most irrational levels since 1974.

It's important to remember that unlike Internet stocks, which lost nearly 80% to 90% of their value in the dot-com bust, what's happening today is affecting businesses that are making good money. You have got businesses that were trading at 8 times earnings last month now selling for 2 times forward earnings, meaning that if profits decline by 50%-75% next year, you still have a fantastically cheap business. In the case of DryShips, the story is even better.

The Asset Play

DryShips currently owns 49 ships. The company's market value is currently around $1 billion, or more than 70% less than what it was just a year ago. Remember that dry-bulk shippers move the goods that move the global economy -- grains, metals -- so it's not hard to see why the stock price has tanked. But it has simply tanked too far relative to the company's assets (not to mention the possible earnings -- more on that later). Here's an abbreviated look at what its balance sheet looked like, as of June 30, 2008:

DryShips Balance Sheet
Cash	$ 294
Total current assets	456
Vessels, net	1,985
Drilling rigs	1,392
Other assets	853
Total Assets	$4,980
Total Liabilities	3,032
Total Equity	$1,948

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