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Stock Upgrades, Downgrades From Ratings

Each business day, 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 that 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 March 5.

Capital Trust (CT), a real estate investment trust, has been downgraded to hold. Strengths such as robust revenue growth, notable return on equity and attractive valuation levels are weighed down by poor debt management, weak operating cash flow and a disappointing stock-price performance. For the third quarter of 2007, revenue rose 39% year over year to $66 million, and EPS improved by a penny to 87 cents over the same period.

This year, the market expects an improvement in full-year EPS to $4.03 from $3.39 a year ago. Return on equity has improved slightly from the year-ago quarter. Net operating cash flow has declined marginally to $18.82 million, or 8.20%, when compared with the same quarter last year. Despite a decrease in cash flow, the company is still fairing well by exceeding its industry average cash flow growth rate. Its debt-to-equity ratio is very high at 5.95, implying very poor management of debt levels. Capital Trust had been rated buy since Ratings initiated coverage on March 3, 2006.

Health Care REIT (HCN), a real estate investment trust that invests in health care facilities, has been upgraded to buy. For the fourth quarter, revenue leaped 52% to $133.5 million, and earnings per share rose to 38 cents from 31 cents in the same period. For 2008, the market expects an improvement in full-year EPS to $1.53 from $1.26 in 2007. The company's gross profit margin is rather high at 55%, and its net profit margin of 37% significantly outperformed the industry average. Health Care REIT had been rated hold since Aug. 9.

ENGlobal (ENG), which, along with its subsidiaries, provides engineering services and systems in the U.S. and internationally, has been downgraded to hold. Compelling growth in net income, robust revenue growth and a solid financial position are countered by weak operating cash flow and poor profit margins. For the third quarter of 2007, net income increased 353.0% to $3.98 million. Revenues rose 17% to $96.8 million, and EPS rose to a profit of 14 cents from a loss of 6 cents.

The company's debt-to-equity ratio of 0.74 is somewhat low but exceeds the industry average. Its quick ratio of 2.08 is high and demonstrates strong liquidity. ENGlobal's gross profit margin is low at 17%, and its net profit margin of 4.1% has decreased from the year-ago quarter. Net operating cash flow has declined marginally to -$4.99 million over the same period. In addition, compared with the industry average, the firm's cash-generation growth rate is significantly lower. ENGlobal had been rated buy since Dec. 10.

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