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TSC Ratings' Updates: Gannett

TheStreet 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, Aug. 15.

Gannett(GCI), a news and information company that operates in two segments, newspaper publishing and broadcasting, was downgraded to sell.

The downgrade is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and which could make it more difficult for investors to achieve positive results compared with most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself.

The company has experienced a steep decline in earnings per share in the most recent quarter in comparison with its performance from the same quarter a year ago. Earnings per share have declined over the last two years. We anticipate that this should continue in the coming year.

The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared with the S&P 500 and the media industry. The net income has significantly deteriorated by 726.5% when compared with the same quarter one year ago, falling to -$2,290.76 million from $365.66 million. During the past fiscal year, Gannett reported lower earnings of $4.18 a share vs. $4.80 a share in the prior year. For the upcoming fiscal year, Wall Street is expecting earnings to fall 12.7% to $3.65 a share.

Return on equity has greatly decreased when compared with its return on equity from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared with other companies in the media industry and the overall market, the firm's return on equity significantly trails that of both the industry average and the S&P 500. Its net cash generation rate is also lower than the industry average -- net operating cash flow in its current quarter decreased to $199.69 million, or a decline of 23.92%.

Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: It has tumbled by 54.02%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 908.87% compared with the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. As a result, we feel the stock is not a good buy at current price levels. Gannett had been rated a hold since Aug. 14, 2006.

Wynn Resorts(WYNN), which engages in the development, ownership and operation of destination casino resorts, was upgraded to buy.

Upgrading Wynn Resorts was driven by some important positives, which we believe should have a greater impact than any weaknesses and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins, growth in earnings per share and increase in net income. However, in the end, we feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself.

Revenue rose by 20% since the same quarter one year prior --underperforming the industry average's revenue growth rate of 24.4%. Despite the lower-than-average revenue growth, its growth appears to have helped boost the earnings per share. As a result, Wynn Resorts in its most recent quarter reported significant earnings per share improvement compared with the same quarter a year ago.

An important factor contributing to its earnings has to do with the company's gross margin of 37.10%, which we consider to be strong. Regardless of Wynn's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the casino's net profit margin of 33% significantly outperformed against the industry.

The company, on the basis of net income growth from the same quarter one year ago, has significantly underperformed compared to the hotels, restaurants and leisure industry average, but is greater than that of the S&P 500. The net income increased by 203.7% when compared with the same quarter one year prior, rising from $89.55 million to $271.99 million.

The company's earnings have been somewhat volatile recently, making it difficult to accurately predict what it will earn in the upcoming quarters. But we feel it is poised for EPS growth in the coming year. During the past fiscal year, Wynn Resorts reported lower earnings of $2.34 a share vs. $5.56 a share in the prior year. In the upcoming fiscal year, analysts' are expecting earnings to improve to $3.39 a share.

Wynn's stock is off 6.01% from its price level of one year ago, reflecting the general market trend and ignoring their higher earnings per share compared with the year-earlier quarter. Despite the stock's decline during the last year, it is still somewhat more expensive (in proportion to its earnings over the last year) than most other stocks in its industry. We feel, however, that other strengths this company displays offset this slight negative. Wynn Resorts had been rated a hold since June 24, 2008.

Hilltop Holdings (HTH), which operates as a property and casualty insurance company, was downgraded to sell.

This downgrade is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths and could make it more difficult for investors to achieve positive results compared with investing in most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its weak operating cash flow, decline in the stock price during the past year and feeble growth in its earnings per share.

The firm's net operating cash flow currently generates a negative cash flow of $3.42 million, which is a significant decrease of about 122% when compared with the same quarter last year. In addition, when comparing with the industry average, the firm's growth rate is much lower.

The change in net income from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared with the Insurance industry average. The net income has decreased by 7.8% when compared with the same quarter one year ago, dropping from to a loss of $6.88 million from a loss of $6.39 million.

The return on equity has improved slightly when compared with the same quarter one year prior. This can be construed as a modest strength in the organization. Compared with other companies in the Insurance industry and the overall market on the basis of return on equity, Hilltop has underperformed against that of the industry average and is significantly less than that of the S&P 500.

The decline in net income contributed to the steep decline in earnings per share in the most-recent quarter in comparison with its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, Hilltop turned its bottom line around by earning 7 cents a share vs. a loss of 54 cents a share in the prior year. Wall Street expects earnings to contract in its upcoming fiscal year by 42.9% to 4 cents a share.

The share price of Hilltop Holdings is down 6.47% when compared with where it was trading one year earlier. This reflects both the trend in the overall market as well as the sharp decline in the company's earnings per share. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time. Hilltop Holdings had been rated a hold since Nov. 11, 2007.

Pharmanet Development(PDGI), which provides clinical drug development services to pharmaceutical, biotechnology, generic drug and medical device companies worldwide, was upgraded to hold.

The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including a decline in the stock price during the past year, disappointing return on equity and poor profit margins.

Pharmanet's revenue growth in its recent quarter slightly increased by 9.9% compared with the same quarter one year prior, outpacing the industry average of 8.2%. The growth in the company's revenue appears to have helped boost the earnings per share. The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the life sciences tools and services industry. The net income increased by 148.3% when compared with the same quarter one year prior, rising to $2.18 million from a loss of $4.52 million.

The gross profit margin for the firm is currently lower than what is desirable, coming in at 33.3%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 1.80% trails that of the industry average. Net operating cash flow has significantly decreased to -$8.56 million, or 152.83%, when compared with the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

Despite currently having a low debt-to-equity ratio of 0.52, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Despite the fact that Pharmanet's debt-to-equity ratio is mixed in its results, the company's quick ratio of 1.66 is high and demonstrates strong liquidity. Pharmanet Development had been rated a sell since May 2, 2008.

Spreadtrum Communications (SPRD), which designs, develops, and markets baseband processor solutions for the mobile wireless communications market, was initiated with a sell.

We initiated a sell rating as a result of a number of negative factors, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared with most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share and unimpressive growth in net income. Spreadtrum earnings per share declined by 14.3% in the most recent quarter compared with the same quarter a year ago. Analysts expect earnings to continue to contract for its upcoming fiscal year by 4.8% to 40 cents a share.

The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed compared with the semiconductors and semiconductor equipment industry average, but is greater than that of the S&P 500. The net income has decreased by 6.0% when compared with the same quarter one year ago, dropping to $2.61 million from $2.78 million.

We do find Spreadtrum's gross profit margins to be quite strong, currently at 45.20%. We cannot be completely bullish on the fact Spreadtrum has a high gross profit margin since the firm has managed to decrease it from the same period last year--the company's net profit margin of 6.5% has also declined lower than the same period one year prior. When compared with other companies in the Semiconductors & Semiconductor Equipment industry and the overall market, Spreadtrum Communications' return on equity is below that of both the industry average and the S&P 500.

Looking at the price performance of SPRD's shares over the past 12 months, there is not much good news to report: The stock is down 67.11%, and it has unperformed the S&P 500. In addition, the company's earnings per share are lower today than in the year-earlier quarter.

Additional ratings changes from Aug. 15 are listed below.