DRYS: DRYS: Cheap on valuation and accelerating margins

Buy: DRYS, Target Price: $100, Time Frame: 6 months If you want a company cheap on valuation, you've got one. Dryships (DRYS) has been extremely oversold over the past few months. The stock currently trades around $80 and has bounced twice off of what is now deemed support at around $60. Over the past few months, DRYS has sold off from $130 to $50 and has now rebounded a bit. And, in one day alone, lost 14% of its value. When companies take a hit this big in this short of time, there is either usually something materially wrong with the company, or the reaction was severely overdone by traders who sell now and ask questions later. DRYS fits in the latter category. DRYS has nothing materially wrong with its industry and there is nothing wrong with the company itself. I'll point that out in the fundamentals section. Just like CSCO, it was a case of a massive sell-off due to uncertain stock market conditions. DRYS is a drybulk shipper and operates globally. They have 35 vessels in total and often carry items such as coal, iron ore, fertilizer, and grains. And, if you follow the commodities markets, you know all these items are in hot demand and in fertilizer's case, short supply. So, as demand continues to pick up, DRYS sees continued shipping volume/traffic. I want to caution people that this name is actually due for a pullback now and looks to have hit a double top in terms of technicals. But, I wanted to touch on the fundamentals here for the long term value investors and get this written so people can set their orders accordingly if they've been following this name. Technicals: DRYS looks bearish technically. And, even though I am bullish on this stock long term, I expect it to pull back in the short term. So, I'm writing this now so people have time to research and position themselves accordingly to find their ideal entries. Currently trading around $83, DRYS has bounced off its double top formation around $87. Pull up a chart of DRYS and you will clearly see what I'm talking about. That area is clear cut resistance for the stock right now, and it will take a big catalyst to push it above this double top (just like the market as a whole needs a catalyst to get through 1410 on the S&P). Combine this double top with the fact that the RSI is nearly overbought levels of 70 and that the full Stochastics are also in the overbought region nearing 80. All these signals point to a topping formation and thus I expect DRYS to trade lower in the short term. So, ultimately, you would want to wait to get into this name. But, as I said earlier, I'm bullish long term on this one and will wait for it to pullback to the most recent support levels of around $60 and enter there. You can also put a clear-cut stop at around $50 as that signals the lows from the bottom back in January when the market had the violent sell off. So, watch the chart for confirmation of the topping pattern in the short term. Or, if we get some sort of catalyst in the market, add to DRYS on the break out above the doubletop at $87. Recent Developments / Fundamentals: DRYS is seeing great strength in the dry bulk shipping charter rates and has reiterated great forecasts for 2008. Oh, and not to mention, they're very bullish on 2009 as well. A Jeffries Analyst recently came out and said that DRYS is currently trading at 3.6x 2008 earnings, making it a steal. He has even gone as far to set a price target of $160 on DRYS over the longer term. Also, another analyst over at Dahlman Rose is bullish on DRYS as well. However, his price target is more reasonable at $100 and it is where I have set my price target as well. The Dahlman Rose analyst cited strong fundamentals within the dry bulk shipping sector and thinks the shares of DRYS are trading at a significant discount currently. Lastly, an analyst at Cantor Fitzgerald raised her 2008 earnings per share outlook from $17.65 per share to $18.52 per share. So, overall, the analyst camp is pretty bullish on DRYS given its current pricing action. It was extremely sold off and the fundamental story still remains the same. Not to mention, DRYS recently announced an investment into Ocean Rig ASA, a Norwegian offshore drilling contractor. And, if you've been following RIG/GSF/ESV/DO, you know that the offshore drillers are performing quite well. DRYS has taken a 30% stake in Ocean Rig for around $400 million. This investment will immediately begin to pay off through 2009 and 2010 once new day rates and contract rates are renegotiated for all their rigs currently in use. DRYS should see some solid gains from this investment and it would seem as if DRYS will continue to invest in the deep water drilling industry. This would mean that DRYS is positioning itself within 2 of the dominant industries globally. Not only is the fundamental story strong within the dry bulk shipping sector, but they are also entering a booming drilling sector as well, a very smart investment. Fundamentally, DRYS has a market cap of 3.4 billion and trades with a trailing PE of 6.2 and a forward PE of 6.2. Clearly this valuation is due to the massive sell-off and these numbers truly show what a steal DRYS is at these prices. Their price to book ratio is 2.96 which is pretty modest in and of itself (the closer to 1 in value, the better). But, where DRYS really cleans up is its operating margins and return on equity. With margins of 66%, DRYS is raking in the cash. And, with a return on equity of nearly 64% as well, DRYS is simply very fundamentally strong. And, both those numbers have increased by nearly 7% each over the past few quarters. So, those booming margins and returns are actually accelerating. The story only gets better when you see that they are experiencing quarterly revenue growth of 195% and quarterly earnings growth of 441%. Yes, that's correct. These numbers are astronomical and would imply that DRYS is trading at an absolutely massive discount to its growth rate. And, that's something investors always look for. The only negative with DRYS is their debt. Currently, they have around $1.24 billion in debt, and only $111 million in cash. So, look for how they manage this debt as they continue to grow. Their strong margins and return on equity should provide them with more cash to pay down this debt, making them an even more fundamentally sound company. Overall, DRYS has great valuations at these levels and it is trading at an extreme discount to its growth rate. With a PE of only 6 and revenue growth of 195%, it's really a no-brainer. This company was oversold and still is oversold. Look for it to hit an analyst price target of $100 in 3 months time. And, you can play this name for the long term as well with a year long time frame as well with a $140 price target. Keep in mind though, that $60 is a key support level now as DRYS has begun to establish itself again after experiencing that massive sell-off. If for some reason the shares dip below $68, then get out as that is a near-term support that's being established. If it breaks this support, it could go lower. Again, watch the technicals on the chart to confirm the double top, forcing DRYS to trade lower short-term. I'm not advocating a buy right this second unless the market gets some big catalyst and DRYS pops above the resistance at $87. I expect it to trade down and would look to get into it around support at $60. Or, you could be more patient and hope it hits the January lows in the 50's. Place your stop below either level of support and call it good. Buy: DRYS, Target Price: $100, Time Frame: 6 months Follow my stock analysis and additional market commentary at http://madhatterstocks.blogspot.com/