January 21, 2008 Issue Posted January 10, 2008, 5:00PM EST

Inside Wall Street

Full Speed Ahead at DryShips

DryShips (DRYS), a bulk shipper of dry commodities such as steel and coal, is projected to earn a hefty $20 a share in 2008, up from 2007's estimated $9.18. Yet its shares, languishing at 63—down from 130 in October—trade at a price-earnings ratio of only 3.15. In 2006, when DryShips earned $2.18 a share, its p-e soared to 39. Part of the stock's drop and meager p-e is DryShips' $405 million purchase in December of a 30% stake in Ocean Rig, a Norwegian offshore driller. Critics worry that DryShips may be deviating from its core shipping, which is going strong. But Robert Johnson of Satuit Capital Management, of which DryShips is the largest holding, remains a bull. Ocean Rig will prove to be "a sterling investment in the next two years," he says. The stock is now as compelling as it was last year when it stood at 50—on its way to 130, says Johnson. Given the company's earning power and surge in global demand, mostly in China, he sees the stock at 100 in 18 months. Douglas Mavrinac of investment firm Jefferies Group (JEF) raised his 2008 profit estimate to reflect the stake in Ocean Rigs, to $20.24 a share. He rates the stock a buy, with a 12-month price target of 160. The impact will be greater in 2009 and 2010, he adds, when Ocean's rigs operate under new contracts at higher day rates. The stock is " extremely oversold," says Mavrinac.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Microchip's Massive Buyback

Microchip Technology's (MCHP) decision to buy back 14.3 million shares has perked up its stock. The maker of microcontroller chips, used in refrigerators, coffee machines, and cars, saw shares fall to 27 in November, down from 42 in June. They have since crept up to 30 on buyback news. Management buys back shares only when it thinks they're undervalued, notes Sarat Sethi of Douglas C. Lane & Associates, which owns stock. In 2007's first quarter, Microchip repurchased shares when the stock began to break down, he says. Usually, it prefers to hike its dividend; the yield is now 4.3%. "So we view this buyback as a sign of the firm's confidence in its future," says Cody Acree of Stifel Nicolaus (SF), who rates the stock a buy, with a target of 42. He raised his forecast for fiscal 2008 from $1.40 to $1.45 and for 2009 from $1.58 to $1.70.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Up and Over at Chicago Bridge

Chicago Bridge & Iron (CBI), one of the few stocks that has bolted steadily higher in this volatile market, is apt to gain more upward traction. Specializing in the energy industry, this engineering and construction company watched its shares pump up from 20 last March to 63 on Jan. 3. Jesse Adelaar of Peconic Partners, which owns shares, figures that if CBI hits its targets of 20% sales growth and 11% in operating margins, it could earn $3 in 2008. Rival Fluor (FLU) could see 15%-20% earnings growth longer-term, he says; it sells at a p-e of 23. CBI, with a p-e of just 16, could hit 75 if it trades at a p-e of 25, says Adelaar. Andy Kaplowitz of Lehman Brothers (LEH), who rates the stock overweight, says CBI is one of his top picks" in engineering and construction. He sees it earning $1.75 a share in 2007 and $2.60 in 2008 vs. $1.19 in 2006.^

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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