Monthly Archives: May, 2013

totem talk top 10 stocks

Totem Talk Top Ten Stocks

May 23rd, 2013 Posted by Investing in Stocks No Comment yet

Totem Talk Top Ten Stocks

Over the last 2 years, we focused on the company analysis, this is the main theme of what we do at Totem. We went over different companies then choose the company for our investment. We had to consider every aspect of the company. I’m glad to announce that today, we finally came up with our Top 10 list, we called it Totem Talk Top Ten Stocks. So what are we waiting for? Let’s get to it.

By the way, ideas from our three teams comprised this whole report. We have the Stories team who updates us with anything about the company’s management, nature of business, history, and background, and treatment with employees. Next in line is the Numbers team who’s after the financial status of the company. And lastly, the Pricing team. As the name implies, the team is responsible for the pricing of the company; if it is a candidate for a buy or not?

We consider every aspect of the company. Here are the processes we went through to come up with our Totem Talk Top Ten Stocks.

The Scale

The core purpose of this is to let us know if the company is doing well when we speak of the management, the financial health, and the market value as well. Each team has their criteria to consider and give a grade of A, B or C. If the company got triple-A from each team, then the company is a good one.

Overall Scale Stories Numbers Pricing
A A A A
A A B A
B A C B
B B B B
B A C A
B B A B
C A C C
C B B C
C C B C

The Notes

The description of the company according to our team. This is also the summary of the characteristic based on the area being discussed. This will give you the idea on the “why” the company was graded A, B or C, what went wrong and its current status.

Market Price Used

This is the stock price of the company used during the period of evaluation.

Buy, Sell or Hold

This is reflected in the area of Pricing. This entails if our team decided to Buy, Sell or Hold based on the result of the analysis.

Score

You might be wondering as to how we arrived at the score. Pointing back to all the above criteria, we came up with the points to represent each. We have also the voting as to “Yes” or “No” if the company can be included in our Top 10. Giving value, Yes is equivalent to 1  point and No is 0.5 point. For the scale, A ranges from 85 to 100, B is from 75 to 84, and C is 74 and below. Additionally, since we have this buy, sell and hold, we also have points for it. For this, Buy is 0.25, Sell is 0, and Hold is 0.125.

The Rank

This is the ranking of the company based on the score.

So out of all the 50 companies that we’ve discussed, and applying all the pointers above, allow me to present to you our Top 10 companies.

Top 10 Companies

Keep in mind that when buying a stock, you’re becoming a part owner of the company. Therefore, choosing the right company is ideal since you will hold the stocks for the long run.

On the side track, do you know that before we came up with this summary, each team faced many challenges? Yes and I can prove that myself. But what is great is we learned a lot in the process. Investing is risky and yet fun. For some fresh from the oven talk, I asked them as to what they can say about the whole process. Come on!

Views/opinions of those who performed the three types of analyses

Karla says, “My experience with the Totem Talk Top Ten Stock lists challenging yet wonderful. First of all, with stories, I managed to update and get to know more about the companies we have worked on in the past and the new ones. With this, I feel like I was trained again on how critical the scaling and grading each company was. Also, working and cooperating with other teams is great since I’m learning from them as well. Seeing the results from everyone’s hard work is truly remarkable.”

For Numbers team, Ms. Rio informed me that, “Although the process took longer [than expected], we are confident of what we had decided since each team shared its evaluation of the company based on its area. ”

And for the finale, “Totem Talk Top Ten Stocks is really brilliant!  Every information you need to know about the company for investment purposes you can find in one place. Like 3 in 1; Stories, Numbers, and Pricing. Great!, ” said Cris of our Pricing team.

This report seems to be easy when you look at it. And that is our goal; to share with you this list in the simplest form possible. But trying to dig down on the behind the scenes, you will find out just how big the effort was. So what more can I say? The experience is hard, needs a lot of patience but truly amazing.

Thank you for reading.

BYD Company Ltd ADR

BYD Company Ltd ADR (BYDDY) On Hold

May 21st, 2013 Posted by Investment Valuation No Comment yet

 BYD Value Investing Approach   

This Pricing Model was prepared for BYD in a very simple and easy way to value a company for business valuation. The essence of value investing according to Benjamin Graham is that investments should be worth less than its real value. This valuation style is to find out undervalued companies with a sound balance sheet.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation      

By calculating market capitalization over the net current asset value of the company, we will know if the stocks are trading over or undervalued. The result should be less than 1.2 ratios.

The formula was: Market Capitalization / NCAV = Result (must be lesser than 1.2)

BYD COMPANY LTD ADR

Explanation

The MC/NCAV valuation tells us that the stock was overvalued from 2008 up to the trailing twelve months because the ratio was greater than the 1.2 ratios. The net current asset value of BYD was negative because current liabilities were greater than its current assets. The ratio shows a -0. 16 against the 1.2 ratios. From there, we can say that the stock price was expensive.

BYD Margin of Safety (MOS)  

The Margin of Safety is the difference between the market value and the real value. In other words, it is used to identify the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies — the market price and the company’s business value or true value.

Formula:  Margin of Safety =  Enterprise Value – Intrinsic Value.

The table shows the historical calculation for the margin of safety.

 BYD COMPANY LTD ADR

Explanation

The average margin of safety was 49 percent, more than the requirement of Benjamin Graham. The average enterprise value per share was $6.8 while the margin of safety was $10.33 per share.

In addition, the formula for the intrinsic value is: 

Intrinsic Value =  Current Earnings x (9 + 2 x Sustainable  Growth Rate)  

The table below will show us the historical results of the calculations for the intrinsic value.

BYDDY IV

Explanation

The average intrinsic value was $14.41 per share while the earnings per share were averaging $0.74 and the annual growth rate was 16.39 percent average.

The term earnings per share (EPS) represent the portion of a company’s earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock. The figure can be calculated simply by dividing net income earned in a given reporting period by the total number of shares outstanding during the same term.

The formula for earning per share is:

EPS

 To calculate the sustainable -growth rate you need to know how profitable the company is as measured by its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

Sustainable Growth Rate

Sustainable growth rate = ROE x (1 – dividend-payout ratio)

BYDDY SGR

The results of the calculation show that the BYD average sustainable growth rate was 3.7 percent and the return on equity was 3.7 as well because there was a zero payout ratio. 

Return on Equity

Return on Equity (ROE), is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners. It shows how many dollars of earnings result from each dollar of equity. For the formula, please refer below:

ROE

The other way of calculating the sustainable growth rate was by using the average approach.

BYDDY Relative

As a result, the average approach produced a higher margin of safety because it takes into consideration the past performance.

Intrinsic Value Graph

Moving forward, I will show you the relationship of a price and value.

BYDDY Graph

Explanation

The intrinsic value is the true value of the stock while the enterprise value represents the market price. The intrinsic value soared up very high from 2008 to 2010 at a rate of 1224 percent. This means that there was a margin of safety from 2008 to 2011 because the intrinsic value line was higher than the EV line. The point of intersection at the year 2012 indicated a zero margin of safety until the trailing twelve months because the IV line is lower than the EV line. In other words, the price was higher than the true value of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)

This valuation will determine whether the stocks are undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share, we can determine the status of the stock price.

BYDDY PE EPS

Explanation

The table above indicates that in the P/E*EPS valuation the stock price was undervalued because the enterprise value was lesser than the P/E*EPS ratio. The enterprise value represents 20 percent of the ratio, thus, the stock price was cheap.

As shown in the table, the price to earnings ratio was so high during 2012 and the trailing twelve months, this is due to being net earnings of only 0.18 percent. Thus, the average P/E was so high.

The average approach takes into consideration the past period’s performance. The summary of the results of the calculations is in the table below:

BYDDY Relative

The relative approach produced a higher result than by using the average approach. The average approach takes into consideration the company’s past performance.

The Enterprise Value (EV)/Earning Per Share (EPS) or (EV/EPS)

The use of this ratio is to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result would then represents the price (P/E) and the difference represents the earnings (EPS).

BYDDY EV EPS

Explanation

This valuation is the separation of price and earnings from the enterprise value.  The price represents 764 percent and the earnings were -664 percent. The earnings were negative because the EPS was very low during 2008, 2009, 2012 and the trailing twelve months.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries. It gives us an idea of how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

BYDDY EV EBITDA

The EV/EBITDA tells us that it will take 4 years to recover the cost of buying the entire business of BYD, in other words, it will take 4 times of the cash earnings of the company to recover the cost of buying the entire business. The EBITDA represents 25 percent of the enterprise value, it is the cash of the company against the enterprise value.

In Summary, 

The market capitalization of  BYD Company Ltd ADR was erratic in movement and during 2009 and 2010, the market capitalization was high.  Total debt was 17 percent and its cash and cash equivalent represents 3 percent of the enterprise value.  Purchasing the entire business, the investor would be paying  86 percent equity and 14 percent debt.

The purchasing price to date May 4, 2013, would be $11 billion at $9.45 per share.  The market price to date was $7.36 per share.

Net Current Asset Value

The net current asset value tells us that the stock price of BYD was overvalued because the stock was trading above the liquidation value of the company.

MC/NCAV

The MC/NCAV approach shows that the stock was overvalued because the ratios exceeded the 1.2 ratios. Further, the margin of safety was 49 percent average. The average intrinsic value was $14.41 per share, while the earnings per share were averaging $0.74. Further, the annual growth rate was 16.39 percent average. The results of the calculation show that the average sustainable growth rate was 3.7 percent. And the return on equity was 3.7 as well because there was a zero payout ratio.

P/E*EPS

The relative method indicates that in the P/E*EPS valuation the stock price was undervalued. Because the enterprise value was lesser than the P/E*EPS ratio. The price represents 764 percent and the earnings were -664 percent.

EV/EBITDA

EV/EBITDA tells us that it will take 4 times of the cash earnings to recover the costs of buying.

 

Research and written by Criselda

Interested to learn more about the company? Here’s an investment guide for a quick view, company research to know more about its background and history; and value investing guide for the financial status.

Genco shipping

Genco Shipping & Trading Ltd. (GNK) Worth Buying?

May 17th, 2013 Posted by Investment Valuation No Comment yet

Genco Shipping & Trading Ltd (GNK). Dry bulk cargoes have continuously increased including commodities like iron ore, coal, grain, and other materials, would this be the best time to consider shipping companies in our portfolio?

Genco Shipping Value Investing Approach  

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. We calculated first the enterprise value as our first step. We believed this is important because it measures the total value of the company.

Genco Shipping Investment in Enterprise Value     

The concept of enterprise value is to arrive at a cost to purchase the entire business. In other words, the Enterprise Value (EV) is the present value of the entire company. Market capitalization, on the other hand, is the total value of the company’s equity shares. In essence, EV is the company’s theoretical takeover price, since the buyer would have to buy all of the stock and pay off existing debt and take all any remaining cash.

GNK EV

Explanation

The market capitalization was erratic in movement. The total debt was 86 percent of the enterprise value, while its cash and cash equivalent were 10 percent. As a result, enterprise value was greater by 76 percent against the market capitalization. Let’s say you are the investor, you would be paying 24 percent of the equity and 76 percent of its total debt if you decided to buy the entire company of Genco Shipping & Trading Limited.

As additional information, the takeover price of  Genco Shipping and Trading Ltd to date April 23, 2013, would be $1.5 billion at $36.21 per share. The market price to date was $1.59 per share.Genco Shipping was too leveraged.                           

Benjamin Graham Stock Test

Net Current Asset Value (NCAV) Approach  

Graham developed and tested the net current asset value (NCAV) approach between 1930 and 1932. Graham reported that the average return, over a 30-year period, on diversified portfolios of net current asset stocks was about 20 percent. An outside study showed that from 1970 to 1983, an investor could have earned an average return of 29.4 percent by purchasing stocks that fulfilled Graham’s requirement and holding them for one year.

Net Current Asset Value (NCAV) Method   

Benjamin Graham’s Net Current Asset Value (NCAV) method is well known in the value investing community.  Studies have all shown that the Net Current Asset Value (NCAV) method of selecting stocks has outperformed the market significantly.

The reason for this according to Graham is when a stock is trading below the Net Current Asset Value Per Share, they are essentially trading below the company’s liquidation value and therefore, the stock was trading at a bargain and worth buying.

The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.

GNK NCAV

Explanation

The net current value approach of Benjamin Graham indicates that the stock price of Genco Shipping was overvalued from 2008 up to the trailing twelve months because the stock is trading above the liquidation value of the company. The 66 percent ratio represents only 18 percent of the market price.  It indicates that the stock of GNK has not passed the stock test by Benjamin Graham because the price was expensive.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation           

Another approach by Benjamin Graham is by calculating market capitalization over the net current asset value of the company. The result should be less than 1.2 ratios. Graham will only buy if the ratio does not exceed 1.2 ratios. 

Market Capitalization / NCAV = Result (must be lesser than 1.2)     

 Genco Shipping and Trading Limited

Further, the MC/NCAV approach of Benjamin Graham tells us that the stock of Genco Shipping is overvalued because the ratio exceeded the 1.2 ratios of 2008 up to the trailing twelve months. Therefore, the stock did not pass the stock test by Benjamin Graham and is not a good candidate for Buy.

Benjamin Graham’s Margin of Safety (MOS)  

The basic meaning of “Margin of Safety” is that investors should only purchase security when it is available at a discount to its underlying intrinsic value or what the business would be worth if it were sold today. It requires knowing when the buying price is low in absolute terms, rather than merely relative to the market as a whole. This formula is measured by the difference between company value and price. Value investing is based on the assumption that two values are attached to all companies – the market price and the company’s business value or true value. Graham called it the intrinsic value. The difference between these two values is called the margin of safety.

Further,

Graham considers buying when the market price is considerably lower than the intrinsic or real value, a minimum of 40 to 50 percent below.  The enterprise value because it takes into account the balance sheet so it is a much more accurate measure of the company’s true market value than market capitalization.

Using the formula Margin of Safety = Enterprise Value – Intrinsic Value

 Genco Shipping and Trading Limited

Explanation

The result of the calculation of margin of safety was 36 percent average of 2008. The average did not pass the requirement of Benjamin Graham of at least 40 percent below the true value of the stock. The intrinsic value was $84.96 average while the enterprise value was $48.37 average.

Intrinsic Value

Going forward, the formula for intrinsic value was:

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable  Growth Rate)   

The explanation in the calculation of intrinsic value was as follows:

  • EPS: the company’s last 12-month earnings per share;
  • G: the company’s long-  term (five years) sustainable growth estimate;
  • 9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham proposed an 8.5, but we changed it to 9); and
  • 2: the average yield on high-grade corporate bonds.

 Genco Shipping and Trading Limited

Explanation

The table above for intrinsic value tells us that the average earnings per share were $0.94, while the sustainable growth rate was 0.60 percent.  In addition, the annual growth rate was 10 percent average.

The earning per share represents the portion of a company’s earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock.

The formula for earning per share was:

     EPS

Sustainable Growth Rate

Sustainable growth rate (SGR) shows how fast a company can grow by using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know how profitable the company is as measured by its return on equity (ROE). You also need to know the dividends paid. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

Sustainable growth rate = ROE x (1 – dividend-payout ratio)
GNK SGR

As shown above that the average return on equity was 3.42 percent. The average payout ratio was 23 percent. Genco Shipping paid its dividends in 2008. A zero payout ratio the succeeding periods up to the trailing twelve months.

Return on Equity

Return on equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates.  

  ROE

Another way of calculating the sustainable growth rate. This is by using the average approach. The average approach takes into consideration the prior period’s performance of the company. Comparing the results using these two approaches the results presented in the table below.

  GNK Relative

Explanation

By using the relative approach, the result of the margin of safety was higher, than by using the average approach. Because the margin of safety in 2007 was zero percent, it takes into consideration the prior periods performance. 

GNK Graph

Explanation

As we can see, the intrinsic value line was erratic in movement, ups, and down trends from 2008 to the ttm. While the enterprise value remains stable in its movements at an average rate of 2 percent. In 2009, the intrinsic value soared up high at a rate of 764 percent, then it dropped by -96 percent to 2011, then went up a little again then another down.

Genco Shipping Relative Valuation Methods     

The core concept of relative valuation methods for valuing a stock is to compare market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)

  GNK PE EPS

Explanation

The stock price of Genco Shipping was overvalued because the P/E/EPS ratio was lesser than the price. The ratio represents only 22 percent of the price.  Further, it indicates that the stock price of GNK was expensive using the P/E*EPS method.

Walking forward, there is another way of calculating this metric and that is by using the average approach.

 Genco Shipping and Trading Limited

The Enterprise Value (EV) /Earning Per Share (EPS) or (EV/EPS)      

The use of this ratio is, to separate price and earnings in the enterprise value. This metric will tells us the the price (P/E) and the difference represents the earnings (EPS).

GNK EV EPS

Explanation

The EV/EPS method tells us that the price (P/E) that was separated from the price was 31 percent and the earnings (EPS) was a 69 percent average. The result of this method is either over or undervalued. It depends on upon the analyst’s own discretion. This is the price that the investor is willing to pay in buying the stock of Genco Shipping.

Enterprise Value (EV) / Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA)                

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings. This metric is useful for analyzing and comparing profitability between companies and industries. It tells us how long it would take the earnings of the company to pay off the price of buying the entire business, including debt.

GNK EV EBITDA

Explanation

It will take 12 years to cover the costs of buying the entire business of Genco Shipping. In other words, it will take 12 times of the cash earnings of the company to recover the purchase price.  It is used to measure the profitability of the company. Twelve years to generate cash to cover the costs is a long period of waiting.

Conclusion

The stock price was overvalued and there was no margin of safety. Therefore, I recommend a HOLD on the stock of Genco Shipping and Trading Ltd.

Research and Written by Cris

 

DryShips-inc-drys

What Makes DryShips Inc (DRYS) Overvalued?

May 3rd, 2013 Posted by Investment Valuation No Comment yet

DryShips Inc (DRYS).

The significance of investment valuation is such that an investor would know if this is the right time to buy considering the market value of the company. It’s like knowing and understanding the opportunity ahead of you. Of course, it’s not only the market price but also the financial health, as well as the management and background of the company, that we should consider.

DryShips Inc was the leader among its peers however the company is experiencing a tough period in the past five years. The global trade was extremely slow resulting in a miserable time in the shipping industry.

DRYS Value Investing Approach               

This model is prepared in a very simple and easy way to value a company, it adopts the investment style of the Father of Value Investing Benjamin Graham. The essence is that any investment should be purchased at a discount, meaning the true value should be more than the market value. Graham believed in fundamental analysis and was looking for companies with a sound balance sheet and with little debt. The basis for this valuation is the company’s five years of historical financial records, the balance sheet, income statement, and cash flow statement. I calculated first the enterprise value as our first step. I believed this is important because it measures the total value of the company.

DRYS Investment in Enterprise Value      

The concept of enterprise value is to calculate what it would cost to purchase an entire business.  In essence, EV is the company’s theoretical takeover price, because the buyer would have to buy all of the stock and pay off existing debt while pocketing any remaining cash. Further, this gives the buyer solid grounds for making an offer.

DRYS EV

Explanation

The enterprise value approach shows that the market capitalization of DryShips Inc was high during 2010 and went down by 58 percent the following period. The result was erratic in movement.  When it comes to total debt, the average was 82 percent of the enterprise value while cash and cash equivalent were an 8 percent average. This makes the enterprise value greater than the market value by 379 percent. Buying the entire business of DRYS the investor will be paying 73 percent of total debt and 27 percent equity. This is the equation that an investor is willing to pay.

Likewise, the purchase price for the entire business of DryShips Inc, to date April 16, 2013, was $4.8 billion at $12.63 per share. The market price to date was $1.82 per share.

Net Current Asset Value (NCAV) Method                  

Net Current Asset Value (NCAV) method is well known in the value investing community. Studies have all shown that the Net Current Asset Value (NCAV) method of selecting stocks has outperformed the market significantly.

The concept of this method is to identify stocks trading at a discount to the company’s Net Current Asset Value per Share, specifically two-thirds or 66 percent of net current asset value.
DRYS NCAVPS

The net current asset value approach indicates that the stock price of DryShips Inc was overvalued from the period 2008 up to the trailing twelve months because the price was greater than the 66 percent ratios.

Market Capitalization/Net Current Asset Value (MC/NCAV) Valuation  

We can know if the stock is trading over or undervalued by simply calculating market capitalization over the net current asset value of the company. The result should be less than 1.2 ratios.

Market Capitalization / NCAV = Result (must be lesser than 1.2)
DRYS MC NCAV

The MC/NCAV valuation shows that the stock price of the company was overvalued from 2008 up to the trailing twelve months because the ratio was over the 1.2 ratios.

The margin of Safety (MOS)                    

The margin of Safety requires knowing when the buying price is low in absolute terms, rather than merely relative to the market as a whole. In my calculation, I used the enterprise value because it takes into account the balance sheet so it is a much more accurate measure of the company’s true market value than market capitalization.

The margin of safety was calculated as Margin of Safety = Enterprise Value – Intrinsic Value

DRYS MOS

Explanation

The table above shows that the average margin of safety for DryShips Inc was 27 percent. As indicated in the table, there was zero margin of safety from 2009 up to 2012. It tells us that the stock did not pass the requirement of at least 40 percent below the intrinsic value. Therefore, the stock may not be a good candidate for a Buy

Intrinsic Value = Current Earnings x (9 + 2 x Sustainable Growth Rate)  

The explanation in the calculation of intrinsic value was as follows:

  • EPS: the company’s last 12-month earnings per share;
  • G: the company’s long-term (five years) sustainable growth estimate;
  • 9: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham (Graham  proposed an 8.5, but we changed it to 9); and
  • 2: the average yield of high-grade corporate bonds.

DRYS IV

Explanation

The calculated average intrinsic value was $76, while the annual growth rate was -6 percent. In addition, the earnings per share were -$1.53 average. The net earnings of DryShips Inc were negative from 2008 up to the trailing twelve months except in 2010. The company was very unprofitable and was not efficient in generating sufficient revenue for its business operation.

The formula for earning per share was:

EPS

Sustainable Growth Rate

On the side note, sustainable growth rate (SGR) shows how fast a company can grow using internally generated assets without issuing additional debt or equity. To calculate the sustainable growth rate for a company, you need to know its return on equity (ROE). You also need to know the dividend payout ratio. From there, multiply the company’s ROE by its plow back ratio, which is equal to 1 minus the dividend payout ratio.

Sustainable growth rate = ROE x (1 – dividend-payout ratio)

DRYS SGR

Explanation

The calculated average sustainable growth rate was -8 percent and same with the return on equity because there was zero payout ratio from 2008 up to the trailing twelve months. This means that DryShips Inc is not paying dividends to its shareholders.

Return on Equity (ROE) is an indicator of a company’s profitability by measuring how much profit the company generates with the money invested by common stock owners.  Return on Equity shows how many dollars of earnings result from each dollar of equity.

ROE

There is another way of calculating the sustainable growth rate and that is by using the average approach. This average approach takes into consideration the prior year’s performance. Walking further, the table below will show us the results of using the two approaches.

Relative and Average Approach

DRYS Relative

By using the relative approach, the margin of safety is higher than by using the average approach.

Further, let us walk a little closer on the intrinsic value through this graph.

DRYS Graph

Explanation

The intrinsic value line which is the true value of the stock was very much higher than the price in 2008, then it drops by 98 percent the following period. Then it continuously drops up to the trailing twelve months nearing the line of zero. The margin of safety is the space in between these two lines and if we put it in figures, the average would be 27 percent. The difference between the true value and the price is the margin of safety. These two lines cannot be separated; it is the company value and the market value.

DRYS Relative Valuation Methods  

The concept of relative valuation methods for valuing a stock is to compare market values of the stock with the fundamentals (earnings, book value, growth multiples, cash flow, and other metrics) of the stock.

Price to Earnings/Earning Per Share (P/E*EPS)      

This valuation will determine whether the stock is undervalued or overvalued by multiplying the Price to Earnings (P/E) ratio with the company’s relative Earning per Share (EPS) and comparing it to the enterprise value per share.
DRYS PE EPS

The P/E*EPS ratio was only 18 percent of the price, therefore the price was expensive.

Using two approaches, the table below will show us the difference.

DRYS Relative PE

The relative approach produces better results as seen above.

The Enterprise value (EV)/Earning Per Share (EPS) or (EV/EPS)      

The use of this ratio is to separate price and earnings in the enterprise value. By dividing the enterprise value of projected earnings (EPS), the result represents the price (P/E) and the difference represents the earnings (EPS).

DRYS EV EPS

Explanation

The EV/EPS valuation tells us that the price (P/E) that was separated from the enterprise value was -118 percent, while the earnings (EPS) was 218 percent. The result was negative because the net earnings were also negative.

Enterprise Value (EV)/ Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) or (EV/EBITDA).                     

This metric is used in estimating business valuation. It compares the value of the company inclusive of debt and other liabilities to the actual cash earnings exclusive of non-cash expenses. This metric is useful for analyzing and comparing profitability between companies and industries.

DRYS EV EBITDA

The EV/EBITDA tells us that it will take 21 years to cover the costs of buying the entire company. It will take 21 times of the cash earnings of DRYS to recover the cost of purchasing. The EBITDA/EV was 10 percent. It also shows that DryShips was unprofitable in generating cash for the business operation.

An Overview,

The market capitalization of DRYS was erratic in movement. Further, its total debt was averaging 82 percent of the enterprise value. While its cash and cash equivalent were 8 percent average, thus enterprise value is greater than the market value by 379 percent. Buying DRYS, an investor will be paying 73 percent of total debt and 27 percent equity. This is the equation that an investor is willing to pay.

The purchase price for the entire business to date April 16, 2013, was $4.8 billion at $12.63 per share. The market price to date was $1.82 per share.

Net Current Asset Value

The net current asset value approach shows that the stock price was overvalued. Because the stock was trading above the liquidation value of the company.  Consequently, the MC/NCAV approach tells us that the stock was overvalued due to the ratio exceeded the 1.2 ratios.

Margin of Safety

Furthermore, the margin of safety was 27 percent average. The growth of DRYS represents as follows: Sustainable Growth Rate was -8 percent; annual growth rate was -6 percent; return on equity was -7.66 percent; earnings per share was -$1.53; and the intrinsic value was $76 average.

Relative Valuation

The relative valuation shows that the stock price was overvalued. Further, the price was greater than the P/E*EPS ratio. The EV/EPS tells us that the price (P/E) -118 percent and the earnings (EPS) was 218 percent.

EV/EBITDA

The EV/EBITDA tells us that it will take 21 years to recover the costs of buying DRYS. In other words, it will take 21 times of the cash earnings to recover the cost of purchasing.

Bottom line, the stock price of DryShips Inc (DRYS) was overvalued and the stock has no margin of safety. In addition, the EV/EBITDA was not impressive and unprofitable. Hence, a SELL position is recommended in the stock of DryShips Inc.

Research and Written by Cris

Interested to learn more about the company? Here’s an investment guide for a quick view, company research to know more about its background and history; and value investing guide for the financial status.

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