We expect AK Steel's cost reduction efforts and renegotiated higher-priced contracts to prevent excessive margin deterioration in light of higher commodity costs. The company has greater product diversification compared to its peers and is focusing on markets and products which have the greatest long-term potential to succeed.

We believe the company will gain from new projects, higher selling prices, and increased shipment. We reiterate the Buy rating and retain our six-month target price of $35.00.

DryShips Initiated at a Hold

DryShips, Inc. (DRYS) is a shipping company that specializes in carrying drybulk commodities, including major bulks such as coal, iron ore, and grains, and minor bulks such as bauxite, phosphate, fertilizers, and steel products. DRYS was formed in September 2004, completing its initial public offering in February 2005 by issuing 14.95 million common shares at $18.00 per share.

We are initiating coverage on DryShips with a Hold recommendation and a $59 target price. In 2008's second quarter, DRYS posted diluted EPS before nonrecurring items of $3.60, up 130% from $1.56 earned in the prior-year quarter. Revenues increased 174% year over year to $289 million, largely due to an almost doubling in TCE rates to $70,701 per day (from $36,092 per day) as well as a 19% increase in voyage days to 3,465 days.

Our diluted EPS estimates are $16.25 for 2008 and $13.00 for 2009. We expect results to continue to benefit from historically high spot rates, and the acquisition of Ocean Rigs ASA, an ultra deep water (UDW) oil driller. We believe the dividend is safe.

Hewitt Associates Feels Downturn

Suburban Chicago-based Hewitt Associates (HEW) is one of the leading providers of human resources outsourcing and consulting services in the world. With more than 60 years of experience in human resources, Hewitt now provides human resources services in 33 countries.

Employment service companies generally participate in the later stage of an economic recovery. With the unemployment rate having risen to 6.1% in August, the expected economic weakness should hamper the financial results of employment-related companies such as Hewitt Associates.

While Hewitt is the clear leader in the emerging human resources BPO (business process outsourcing) market, the target price is $40.25, which is a 20 P/E multiple on trailing 12-month EPS. Given the minimal expected price appreciation, the stock is rated a Sell.

Merck Growth Outlook Flattening

New Jersey-based Merck (MRK) discovers, develops, manufactures and markets a broad range of innovative products to improve human health, both directly and through its joint ventures. Key products that contribute to sales growth are Singulair for asthma and seasonal allergic rinitis, Gardasil, a cervical cancer vaccine, Cozaar/Hyzaar for high blood pressure, and Januvia/Janumet for type-II diabetes.

Merck's vaccine business, propelled by Gardasil, and other products such as Januvia, have been the catalysts for revenue growth. Mega-blockbuster Singulair has recently experienced a significant flattening in sales but will continue to be a huge contributor to Merck's top-line.

Vioxx litigation risk, although not eliminated, is greatly reduced with the 2007 settlement. The patent expiration of Fosamax and the issues surrounding Vytorin and Zetia will slow revenue growth. EPS growth will come from continued cost-cuts.

Despite Merck's challenges we rate the shares a Hold based on valuation. We see $37 as a near-term target.

Sara Lee Keeps Its Buy Rating

Sara Lee Corporation (SLE) is a global consumer packaged goods company that manufactures and markets a diverse array of branded products. In fiscal 2008, the company reported results in six business segments: International Beverage (24%), North American Retail Meats (18%), Household & Body Care (17%), North American Retail Bakery (17%), Foodservice (17%),and International Bakery (7%).

Sara Lee implemented The Transformation Plan to create a focused consumer brand company generating sales growth in the range of 4% to 5% and earnings growth in the range of 5% to 8% by 2010. The Plan was announced over two and one half years ago and positive year-over-year EPS comparisons are now expected.

Sara Lee adopted the Brand Segmentation strategy, which directs the company's focus on the brands that have better potential for profitable growth in the long-term. Also, management is committed to increasing revenues through new product introductions.