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On March 20, 2014, we issued an updated research report on DryShips Inc. (DRYS - Analyst Report). The drybulk shipping rates and ship values have improved considerably in recent times and management is expecting the trend to continue in 2014 mainly buoyed by increasing demand for dry bulk commodities globally.

DryShips delivered an average negative earnings surprise of 83.33% in all the four quarters last year. The company reported mixed financial results for the fourth quarter of fiscal 2013 with the bottom line missing the Zacks Consensus Estimate but the top line beating the same.

DryShips is gradually transforming itself into an ultra-deepwater drilling company rather than continuing as a simple drybulk cargo operator. The acquisition of Ocean Rig turned out to be a major positive. Ocean Rig’s asset and contract portfolio diversified DryShips’ assets and sources of cash flow.

The offshore drilling division continues to flourish buoyed by rising expenditure from oil companies and success in ultra-deepwater oil field discoveries. The deepwater oil drilling segment is currently witnessing rig shortage throughout the world, as energy companies have raised the level of production.

Despite an improving U.S. macroeconomic scenario, the drybulk shipping industry is still not out of the woods. This is solely attributable to non-economic decisions taken by the shipping companies in 2008, just before the onset of worldwide recession. The sheer increase of vessels under operation resulted in intense price competition. Most of the vessel operators had ordered large number of newbuild ships in several docks due to the lack of near-term foresight. The glut of ships resulted in severe cut-throat price competition.

The main problem for DryShips is that a major portion of its shipping contracts are currently under volatile spot rate market. Such a wide exposure will definitely result in severe top-line fluctuations, going forward.

The drybulk shipping industry is cyclical in nature with volatility in charter hire rates and profitability. Future demand and supply of drybulk commodities are very difficult to predict. Several economic and geopolitical events can significantly affect demand, supply, price, and transportation of drybulk commodities within a short span of time. As a result, drybulk shipping rates will also become volatile.

DryShips currently has a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Other better-ranked stocks in the shipping industry are Eagle Bulk Shipping, Inc. (EGLE - Snapshot Report), Genco Shipping & Trading Ltd. and Frontline Ltd. (FRO - Snapshot Report). All three stocks currently sport a Zacks Rank #2 (Buy).

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