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TSC Ratings' Updates: Hawaiian Electric Industries

TheStreet.com Ratings Staff

The following ratings' changes were generated on September 30, 2008.

Hawaiian Electric Industries(HE Quote) has been upgraded from hold to buy. Hawaiian Electric Industries, through its subsidiaries, engages in electric utility, banking and other businesses primarily in the state of Hawaii. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income.

The revenue growth came in higher than the industry average of 7.1%. Since the same quarter one year prior, revenue rose by 28.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.

Compared with its closing price of one year ago, HE's share price has jumped by 34.91%, exceeding the performance of the broader market during that same time frame. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared with the rest of its industry. The other strengths this company shows, however, justify the higher price levels.

HE 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. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, HE reported lower earnings of $1.02 vs. $1.33 in the prior year. This year, the market expects an improvement in earnings ($1.66 vs. $1.02).

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. When compared with other companies in the electric utilities industry and the overall market, HE's return on equity is below that of both the industry average and the S&P 500.

The gross profit margin for HE is currently extremely low, coming in at 13.00%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 0.70% trails that of the industry average.

HE had been rated a hold since August 5, 2008.

Under Armour(UA Quote) has been upgraded from sell to hold. Under Armour, designs, develops, markets and distributes performance apparel, footwear, and accessories for men, women, and youth primarily in the U.S and Canada. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and premium valuation.

Despite its growing revenue, the company underperformed as compared with the industry average of 31.1%. Since the same quarter one year prior, revenue rose by 30.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.

UA's debt-to-equity ratio is very low at 0.10 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 1.22, which illustrates the ability to avoid short-term cash problems.

UA 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. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, UA increased its bottom line by earning $1.05 vs. 79 cents in the prior year. This year, the market expects an improvement in earnings ($1.18 vs. $1.05).

Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 48.48%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 72.72% compared with the year-earlier quarter. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, UA is still more expensive than most of the other companies in its industry.

The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared with that of the S&P 500 and the textiles, apparel & luxury goods industry. The net income has significantly decreased by 75.9% when compared with the same quarter one year ago, falling from $5.71 million to $1.38 million.

UA had been rated a sell since April 30, 2008.

Commercial Metals(CMC Quote) has been downgraded from buy to hold. Commercial Metals Company engages in the manufacture, recycle, market, and distribution of steel and metal products and related materials and services in the U.S. and internationally. Our recommendation is supported by the company's strong revenue growth and lower leverage level. These positives are further strengthened by strategic acquisitions and a positive outlook provided by the management. However, integration related challenges, deteriorating margins, and returns are the potential downside risks to the buy rating.

Commercial Metals' third quarter revenue increased 29.7% to $2.91 billion from $2.24 billion, driven by an impressive revenue growth across its segments. Revenue from the Americas Recycling, Americas Mills and Americas Fab and Distribution grew 20.7%, 19.7%, and 15.6%, respectively. Meanwhile, International Mills and International Fab and Distribution sales rose 49.0% and 52.6%, respectively. Total mills and fabrication shipments rose 2.3% and 14.4% to 1.01 million tons and 452,000 tons, respectively.

Although the company's debt-to-equity ratio increased to 0.62 from 0.48, it is currently operating at a lower leverage level, implying the successful management of debt levels.

During the quarter under review, CMC completed the acquisition of all the operating assets of ABC Coating Company of Texas Inc. of Waxahachie, Texas; ABC Coating Co., Inc. of Brighton, Colorado; Banner Rebar Inc. of Denver, Colorado; and Toltec Steel Services Inc. of Kankakee, Illinois, which is expected to drive its revenue in the upcoming quarters.

The company forecasts its fourth quarter earnings per share to be in the range of 90 cents to $1.00. Additionally, the company expects that all its segments will continue to grow except americas fabrication and distribution segment, which may experience additional margin pressure due to rising steel prices.

Despite strong revenue growth, the company's margins and net income deteriorated significantly during the quarter. Additionally, both return on asset and equity narrowed 499 and 936 basis points. Furthermore, any failure of the company to successfully integrate recent acquisitions may negatively impact its financial position in the upcoming quarters.

CMC had been rated a buy since September 29, 2006.

Salesforce.com (CRM Quote) has been downgraded from buy to hold. Salesforce.com provides on-demand customer relationship management (CRM) services to businesses and industries worldwide. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and impressive record of earnings per share growth. However, as a counter to these strengths, we also find weaknesses including premium valuation and a decline in the stock price during the past year.

The revenue growth greatly exceeded the industry average of 15.6%. Since the same quarter one year prior, revenue rose by 49.0%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

CRM has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. 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.

The gross profit margin for CRM is currently very high, coming in at 82.80%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, CRM's net profit margin of 3.80% significantly trails the industry average.

CRM's share price is down 12.79%, reflecting, in part, the market's overall decline, investors ignoring the increase in its earnings per share. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. It was down over the last twelve months; and it could be down again in the next twelve. Naturally, a bull or bear market could sway the movement of this stock.

CRM had been rated a buy since May 23, 2008.

Alcoa(AA Quote) has been downgraded from buy to hold. Alcoa, engages in the production and management of primary aluminum, fabricated aluminum and alumina worldwide. The company involves in the technology, mining, refining, smelting, fabricating, and recycling of aluminum. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, poor profit margins and weak operating cash flow.

The current debt-to-equity ratio, 0.52, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that AA's debt-to-equity ratio is low, the quick ratio, which is currently 0.57, displays a potential problem in covering short-term cash needs.

The revenue fell significantly faster than the industry average of 41.5%. Since the same quarter one year prior, revenue slightly dropped by 5.5%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.

The gross profit margin for AA is rather low; currently it is at 21.00%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 7.20% significantly trails the industry average.

Net operating cash flow has decreased to $1,007.00 million or 25.35% when compared with the same quarter last year. In addition, when comparing the cash generation rate with the industry average, the firm's growth is significantly lower.

AA had been rated a buy since November 27, 2006. Additional ratings generated on September 30, 2008 are listed below.

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.