TSC Ratings' Updates: Netflix

The following ratings changes were generated on Friday, Dec. 26.

We've upgraded Netflix (NFLX Quote), which provides online movie rental subscription services in the United States, from hold to buy. This upgrade is driven by the company's impressive record of earnings per share growth, compelling growth in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures and notable return on equity. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results.

Netflix has improved earnings per share by 43.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, Netflix increased its bottom line by earning $0.97 versus $0.71 in the prior year. This year, the market expects an improvement in earnings ($1.28 versus $0.97).

The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Internet & Catalog Retail industry average. The net income increased by 30.2% when compared to the same quarter one year prior, rising from $15.65 million to $20.37 million.

Netflix's revenue growth trails the industry average of 31.2%. Since the same quarter one year prior, revenues rose by 18.3%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

Netflix's debt-to-equity ratio is very low at 0.12 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.21, which illustrates the ability to avoid short-term cash problems.

Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. In comparison to other companies in the Internet & Catalog Retail industry and the overall market on the basis of return on equity, Netflix has underperformed in comparison with the industry average, but has greatly exceeded that of the S&P 500.

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