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TSC Ratings' Upgrades, Downgrades: Baidu, Sotheby's

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 Tuesday, May 13.

Analog Devices (ADI Quote - Cramer on ADI - Stock Picks), which designs, manufactures and markets analog, mixed-signal and digital processing integrated circuits, has been upgraded to buy. For the first quarter, revenue increased 3.8% year over year to $613.9 million, while earnings per share declined to 40 cents from 45 cents.

With no debt to speak of, Analog Devices has a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Its quick ratio of 2.27 demonstrates an ability to cover short-term liquidity needs. Return on equity has improved slightly from the year-ago quarter to 20%. This can be construed as a modest strength in the organization. The gross profit margin is rather high at 67%. The net profit margin of 60% significantly outperforms the industry average. Analog Devices had been rated hold since Nov. 28.

Baidu.com (BIDU Quote - Cramer on BIDU - Stock Picks), which provides Chinese language Internet search services, has been upgraded to hold. Strengths such as robust revenue growth, a solid financial position and notable return on equity are countered by a premium valuation. For the first quarter, revenue more than doubled year over year to $81.9 million, and earnings per share climbed to 60 cents from 32 cents.

With no debt to speak of, Baidu has a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Its quick ratio of 2.98 demonstrates an ability to cover short-term cash needs. Gross profit margin is rather high at 70%. A net profit margin of 26% compares favorably to the industry average. Shares have nearly tripled in price over the past year, netting the stock a price-to-earnings ratio of 132.92, which makes it much more expensive than the industry average. Baidu.com had been rated sell since March 20.

SunPower (SPWR Quote - Cramer on SPWR - Stock Picks), which designs, makes and markets solar power technologies, has been upgraded to hold. Strengths such as robust revenue growth, an increase in net income and solid stock-price performance are held back by disappointing return on equity and poor profit margins.

For the first quarter, revenue jumped 92% year over year to $273.7 million, and earnings per share climbed to 15 cents from 2 cents. Return on equity has slightly decreased from the same quarter one year prior and lags the industry average, implying a minor weakness in the organization. Gross profit margin is rather low at 22%. The net profit margin of 4.7% also trails the industry average. Shares have risen 47% over the past year, netting the stock a price-to-earnings ratio of 351.67, which places it at a substantial premium to the industry average. SunPower had been rated sell since March 20.

Sotheby's (BID Quote - Cramer on BID - Stock Picks), which operates as an auctioneer of fine art, antiques, decorative art, jewelry and collectibles, has been downgraded to hold. Strengths such as a solid financial position, a reasonable valuation and good cash flow from operations are countered by unimpressive growth in net income, poor profit margins and disappointing return on equity.

For the first quarter, revenue declined 12% year over year to $129.3 million, and earnings per share swung to a loss of 19 cents from a profit of 37 cents. Gross profit margin is currently lower than desirable at 30%. A negative net profit margin of 9.6% is significantly below that of the industry average. The company's debt-to-equity ratio, 0.49, is low, implying successful management of debt levels. Its quick ratio of 1.18 is adequate. Sotheby's had been rated buy since Sept. 6, 2006.

Broadridge Financial Solutions (BR Quote - Cramer on BR - Stock Picks), which provides technology-based outsourcing solutions to the financial services industry, has been initiated with a hold rating. Strengths such as revenue growth, a solid financial position and notable return on equity are held back by unimpressive growth in net income and poor profit margins.

For the third quarter of fiscal 2008, revenue increased 1.1% year over year to $505 million, and earnings per share declined to 21 cents from 30 cents. The company's debt-to-equity ratio is somewhat low at 0.81, implying successful management of debt levels. Its quick ratio of 1.18 illustrates an ability to avoid short-term cash problems. Gross profit margin is rather low at 25%. The net profit margin of 5.8% significantly trails the industry average.

Additional ratings changes from May 13 are listed below.