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TSC Ratings' Upgrades, Downgrades

TheStreet.com Ratings Staff

Each business day, TheStreet.com Ratings updates its ratings on the stocks it covers. The proprietary ratings model projects a stock's total return potential over a 12-month period, including both price appreciation and dividends. Buy, hold or sell ratings designate how the Ratings group expects these stocks to perform against a general benchmark of the equities market and interest rates.

While the ratings model is quantitative, it uses both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and company earnings forecasts. Objective elements include volatility of past operating revenue, financial strength and company cash flows.

However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could affect the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.

For those reasons, we believe a rating alone cannot tell the whole story, and that it should be part of an investor's overall research.

The following ratings changes were generated on Friday, May 2.

Verizon VZ, a telecommunications company, has been upgraded to buy. For the first quarter, revenue grew 5.5% year over year to $23.83 billion, and earnings per share climbed to 57 cents from 51 cents. For 2008, the market expects an improvement in full-year EPS to $2.62 from $1.90 in 2007.

Net operating cash flow has increased 19% to $5.39 billion. Its cash-flow growth rate exceeds the industry average. The gross profit margin is high at 60%, but the net profit margin of 6.9% trails the industry average. Share price has not changed much from where it was a year ago. We believe the stock still has good upside potential. Verizon had been rated hold since Feb. 29.

StatoilHydro STO, which explores, produces, transports, refines and markets petroleum and petroleum-derived products, has been upgraded to buy. For the fourth quarter, revenue grew 41% year over year to $26.26 billion, while earnings per share declined to 33 cents from 98 cents. Net operating cash flow has more than doubled to $4.95 billion in the same period. Its cash flow growth rate exceeds the industry average.

At 37%, the gross profit margin is strong, although a net profit margin of 4.1% trails the industry average. The company's debt-to-equity ratio of 0.28 is very low but exceeds the industry average, and its quick ratio of 0.70 is somewhat weak and could be cause for future problems. Shares have climbed 26% in the past year. Despite the increase in price, the stock's price-to-earnings ratio of 9.81 makes it cheap relative to others in its industry. StatoilHydro had been rated hold since March 20.

Symantec SYMC, which provides software and services for information security, availability, compliance, information technology and systems performance, has been upgraded to buy. For the fourth quarter, revenue increased 13% year over year to $1.54 billion, and earnings per share climbed to 22 cents from 7 cents. For 2008, the market expects an improvement in full-year EPS to $1.43 from 53 cents in 2007. Net operating cash flow has increased 10% to $674.4 million from the year-ago quarter. At 77% the gross profit margin is currently very high. However, the net profit margin of 12% significantly trails the industry average. Symantec had been rated hold since Feb. 12, 2007.

CyberSource CYBS, a provider of electronic payment and risk-management solutions, has been upgraded to buy. For the first quarter, revenue more than doubled to $141.4 million, while earnings per share declined to a penny from 2 cents.

With no debt to speak of, CyberSource has a debt-to-equity ratio of zero, which we consider a favorable sign. Its quick ratio of 2.17 demonstrates an ability to cover short-term liquidity needs.

Net operating cash flow has significantly increased to $11.7 million when compared with the same quarter last year. The company's gross profit margin is high at 68%. However, its net profit margin of 1% significantly trails the industry average. Shares have leapt 40% in the past year. We feel, however, that other strengths this company displays justify these higher price levels. CyberSource had been rated hold since Feb. 8.

Omniture OMTR, which provides online business optimization software, has been upgraded to hold. Strengths such as robust revenue growth, a solid financial position and good cash flow from operations are balanced by deteriorating net income and feeble growth in earnings per share. For the first quarter, revenue more than doubled to $69.6 million, while the company's per-share loss increased to 19 cents from 5 cents.

For 2008, the market expects an improvement in full-year EPS to a profit of 45 cents from a loss of 18 cents in 2007. Omniture's debt-to-equity ratio of 0.01 is very low but exceeds the industry average. Its quick ratio of 1.24 illustrates the ability to avoid short-term cash problems. Omniture had been rated sell since TheStreet.com Ratings initiated coverage on July 31.

Eastman Kodak EK, a maker of digital and film-based imaging products, has been downgraded to sell. At 28%, gross profit margin trails the industry average.

Net operating cash flow has significantly decreased to negative $768 million or from the year-ago quarter. Return on equity greatly increased year over year but remains at negative 4.7%, significantly below the industry average. The current debt-to-equity ratio, 0.52, is low and is below the industry average, implying successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.08, which illustrates the ability to avoid short-term cash problems. Shares have tumbled 32% in the past year. The decline may make the stock attractive in the future, but due to other concerns, we feel that it is still not a good buy right now. Eastman Kodak had been rated hold since Nov. 3, 2006.

Additional ratings changes from May 2 are listed below.