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DynCorp chart looking up - does it deserve the reversal?

Poking through Tuesday's Alert HQ stock signals I came across an interesting Trend Buster. The company is DynCorp (DCP) and the chart is below.

Several things about this company grabbed my attention. Starting with the chart, we have the following positive developments:
  • Price has broken above the trend line (downward sloping blue line)
  • Price has broken above the 50-day moving average
  • Chart pattern looks suspiciously like an inverted head-and-shoulders. This is generally considered a very bullish setup
  • MACD is bullish
  • Aroon is bullish, suggesting a strong positive trend

DCP stock chart - trend buster

Background --

DynCorp provides law enforcement training and support, security services, base operations, aviation services, contingency operations, interpreters and logistics support to civilian and military government agencies worldwide. The company is currently training police in Afghanistan and has been active in Iraq and Africa.

As a contractor willing to work in the hotspots of the world, DynCorp is one of those companies that is able to prosper while the bullets are flying. Still, the company has not been exempt from the effects of the global economic downturn. In addition, with the election of Obama and the Democratic majority, investors are no doubt assuming that DynCorp's role may soon be shrinking as the administration attempts to pull back from foreign entanglements. As a result, the stock price has been under pressure until just recently.

The financials --

Here's something else that grabbed my attention. With the price down so low, the stock is looking very much like a deep value stock. The table below presents a number of measures.

Symbol Name Last Price Market Cap PE PEG Price To Sales
DCP DYNCORP INT'L, INC. $11.81 $652.9M 8.14 0.72 0.20
Price To Book Debt To Equity Enterprise Value to EBITDA Sequential EPS change YOY EPS change Sequential Rev Change YOY Rev Change
1.16 0.9309 4.777 -2.7% 05.88% 11.4% 15.48%

All the typical value measures are looking pretty good: PE, PEG, Price to Sales, Price to Book, Enterprise Value to EBITDA. Each is in the range that suggests the stock is far from over-valued.

Financial performance is summarized in the chart below:

DCP financials

Here we can see revenue on the upswing, more so than earnings per share. In fact, EPS has been somewhat flat though, as the table above this chart shows, y-o-y EPS did show a modest 5% improvement.

Conclusion --

DynCorp's stock seems to be deeply over-sold based on its current valuation measures and stock chart. The price is finally recovering though and the chart setup is verging on real bullishness. With an upside breakout through it's trend line, the company seems to be demonstrating a nice reversal.

In order to keep up the momentum, however, the company will have to prove that it can convert some of these surging revenues into improved earnings per share. With the international situation still favoring the company and its services, I suspect there isn't much risk in owning this stock at this price.

Disclosure: no position


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