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Stock Upgrades, Downgrades From TheStreet.com Ratings

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 made on Feb. 8.

Hospira (HSP), a developer of specialty injectable pharmaceuticals and medication delivery systems, has been upgraded to buy. The company's strengths include an increase in net income, good cash flow from operations and expanding profit margins. We feel these strengths outweigh poor debt management.

For the third quarter of its fiscal 2007, Hospira posted year-over-year revenue growth of 29.6%, which greatly exceeds the industry average. This has helped earnings per share improve by 5.7% in the same period. The company has demonstrated a pattern of positive earnings per share growth over the past year, and this trend should continue.

Net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than the industry average. Net income increased by 6.1% year over year to $59.38 million. Net operating cash flow has increased 20.37% to $182.89 million from the year-ago quarter. Hospira had been rated hold since May 11.

James Hardie (JHX), a manufacturer of fiber cement building products, has been upgraded to hold. The company shows notable return on equity and expanding profit margins, but the stock itself hasn't performed well, and the company has unimpressive net income growth and poor debt management.

James Hardie's return on equity has greatly increased year over year, exceeding the industry average. This is a signal of strength. In the second quarter of its fiscal 2007, the company marked an EPS decline of 13%, and earnings have been volatile lately. However, James Hardie is likely poised for EPS growth in the coming year.

Shares have fallen 29.03% over the past 12 months, underperforming the S&P 500. In addition, the company's earnings per share are lower today than the year-earlier quarter. Despite the heavy decline in its share price, this stock is still more expensive (when compared to its current earnings) than most other companies in its industry. James Hardie had been rated sell since Oct. 5, 2006.

Sunoco (SUN), a petroleum company, has been downgraded to hold. The company's strengths include revenue growth, an attractive valuation and good cash flow from operations. Weaknesses include feeble EPS growth, deteriorating net income and poor profit margins.

For the fourth quarter, Sunoco's revenue rose by 49.6% year over year. However, net income growth has significantly underperformed the industry average, swinging to a loss of $9 million vs. a profit $123 million a year ago. Sunoco's gross profit margin is extremely low at 3.4% and has decreased over the pas year. The company's net profit margin also trails the industry average. Sunoco had been rated buy since May 4.

Coach (COH), which designs and markets accessories and gifts for men and women, has been downgraded to sell, mainly on weakness in the stock's performance.

Despite a year-over-year increase in cash flow, Coach's cash flow growth rate still lags the industry average. The company's debt-to-equity ratio is very low at 0.01, implying very successful management of debt levels. Its quick ratio of 2.42 also demonstrates an ability to cover short-term liquidity needs.

Return on equity has improved year over year, a clear sign of strength within the company. The gross profit margin for Coach is currently very high, coming in at 77.90%. It has increased significantly from the same period last year. Along with this, the net profit margin of 25.80% significantly outperformed against the industry average.

Shares have dropped 36.03% in the past year in spite of earnings improvements. The decline in price could make the stock attractive down the road. However, we believe that it is too soon to buy. Coach had been rated hold since Dec. 27.

Centex (CTX), a homebuilder, has been downgraded to sell. Feeble growth in its earnings per share, deteriorating net income, generally weak debt management, disappointing return on equity and weak stock performance all contribute to the downgrade.

Centex has marked an EPS decline over the last two years, and we anticipate that this trend should continue in the coming year. During the past fiscal year, the company swung to an EPS loss of 17 cents, vs. a profit of $9.24 a share a year ago. For the next year, the market expects a bigger dropoff in earnings, forecasting a loss of $14.99 a share.

Centex's debt-to-equity ratio of 1.31 is high compared with the industry average. Return on equity has greatly decreased from the same quarter one year prior, a signal of major weakness.

Over the past year, the stock has tumbled by 54.88%, and third-quarter fiscal 2007 earnings per share are down 295.02% compared with the year-earlier quarter. In one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now. Centex had been rated hold since March 5.

Additional ratings changes from Feb. 8 are listed below.

Ticker Company Name Change New Rating Former Rating
MFA MFA MORTGAGE INVESTMENTS INC Upgrade Hold Sell
ARJ ARCH CHEMICALS INC Upgrade Buy Hold
ARTC ARTHROCARE CORP Downgrade Hold Buy
CECE CECO ENVIRONMENTAL CORP Downgrade Hold Buy
CNBC CENTER BANCORP INC Downgrade Sell Hold
CTX CENTEX CORP Downgrade Sell Hold
COH COACH INC Downgrade Sell Hold
CYBS CYBERSOURCE CORP Downgrade Hold Buy
HMG HMG COURTLAND PROPERTIES Downgrade Sell Hold
IVC INVACARE CORP Upgrade Hold Sell
NANO NANOMETRICS INC Downgrade Sell Hold
NWLIA NATIONAL WESTERN LIFE Downgrade Hold Buy
NETM NETMANAGE INC Upgrade Hold Sell
SUN SUNOCO INC Downgrade Hold Buy
TRUE CENTRUE FINANCIAL CORP Downgrade Hold Buy
JHX JAMES HARDIE INDUSTRIES NV Upgrade Hold Sell
HHGP HUDSON HIGHLAND GROUP INC Downgrade Sell Hold
HSP HOSPIRA INC Upgrade Buy Hold
SMA SYMMETRY MEDICAL INC Upgrade Buy Hold
DHT DOUBLE HULL TANKERS Downgrade Sell Hold
ACTC ADVANCED CELL TECHNOLOGY INC Initiated Sell
HIMX HIMAX TECHNOLOGIES INC Upgrade Hold Sell
FXCB FOX CHASE BANCORP INC Initiated Sell
SBH SALLY BEAUTY HOLDINGS INC Initiated Sell
WSFG WSB FINANCIAL GROUP INC Initiated Sell
MWA.B MUELLER WATER PRODUCTS INC Initiated Sell

This article was written by a staff member of TheStreet.com Ratings.

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