The Business of Value Investing.pdf

Practicing the Art of Patience 167

prudent judgments had to be made with regard to possible market

values for the ships and the drilling rigs.

• Vessels, on the balance sheet at $ 2.1 billion, were discounted
  by 50 percent because the supply of ships had greatly
  exceeded the current demand. Recent ship sales of similar
  vessels were at 30 percent to 50 percent less.


• The drilling rigs, at $ 1.4 billion, were discounted 10 percent.
  The long - term market for ultra - deep water business, while tem-
  porarily affected by the reduced price of oil, was still sound.
  Long - term demand exceeded supply, and these rigs took
  years to build, which suggested that cash - rich oil companies
  would easily pay full price today to secure the rigs for future
  expansion.


• Goodwill, which represented $ 700 million of other noncur-
  rent assets, was completely written down to zero. This good-
  will represented the excess price over net asset value of
  prior acquisitions and should not be counted on in a buyers ’
  market.


• Liabilities are not affected since creditors are first in line to
  be paid should a business be forced to liquidate.

These adjustments totaled approximately $ 1.8 billion, for an

equity value of $ 330 million. At 43 million shares, this equates to

conservative liquidation value of $ 7.70 a share. At the then - current

share price of $ 3 a share , DryShips passes one test — the liquidation

value of the company under extremely stressful conditions — of

investment suitability.

Growing Intrinsic Value Provides Undervaluation

It might come as a shock to some that value investors love growth.

While the investment world likes to separate investors as value

oriented or growth oriented, value and growth are one and the

same. Growth is a major determinant of value creation. The only

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