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Stock Upgrades, Downgrades From Ratings: March 17

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 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 13.

Healthways (HWAY - Get Report), which provides specialized health care support solutions in the U.S., has been downgraded to hold. Poor bottom-line performance, reduced guidance and a deteriorating balance sheet contribute to the downgrade, while solid revenue growth and increasing backlog are positives.

For the first quarter, net income decreased 5.5% to $11.2 million year over year. Furthermore, management reduced guidance for 2008 due to slower enrollments and the loss of two large contracts worth $90 million of backlog. They expect earnings in the range of $1.50 to $1.55 a share, down from previous guidance of $1.77 to $1.86 a share. Loss of contracts drove 80.0% of the reduction in guidance.

Total debt increased to $288.7 million in the first quarter of 2008 from $370,000 a year ago. This translated into a total debt-to-equity ratio of 0.75, which is higher than the industry average. Revenue increased 50% to $175.8 in the same period.

The company currently bills for 26.7 million people (billed lives) in the U.S. while the entire population of its health plan and employer commercial customers (available lives) totaled 183.40 million. This indicates ample growth potential within the existing customer base. The company is making efforts to increase its available lives by increasing its geographic footprint. Healthways had been rated buy since Ratings initiated coverage on March 10, 2006.

UnitedHealth (UNH - Get Report), a health care provider, has been downgraded to hold. The company's growth in earnings per share, increase in net income and revenue growth are weighed down by disappointing stock-price performance, weak operating cash flow and poor profit margins.

For the fourth quarter, earnings per share improved year over year to 92 cents from 84 cents. For 2008, the market expects an improvement in full-year EPS to $3.96 from $3.42 in 2007. UnitedHealth's debt-to-equity ratio, 0.55, is low, implying successful management of debt levels. However, its quick ratio of 0.61 displays a potential problem covering short-term cash needs. Net operating cash flow has decreased 33% to $1.07 billion year over year.

Shares have fallen 31% in the past year. The decline has netted the stock a price-to-earnings ratio of 10.73, making it cheaper than others in its sector. But due to other concerns, we feel the stock is still not a good buy right now. UnitedHealth had been rated buy since Ratings initiated coverage on March 10, 2006.

Silver Wheaton (SLW - Get Report), a silver mining company, has been downgraded to hold. Strengths such as rising net income, revenue growth and expanding profit margins are balanced by a premium valuation, poor debt management and disappointing return on equity.

For the fourth quarter, net income increased 4.7% year over year to $24.9 million, and revenue rose 15% to $50.2 million. Net operating cash flow has increased to $34.41 million in the same period. Despite an increase in cash flow, the company's cash flow growth rate of 15% trails the industry average. With a price-to-earnings ratio of 49.56, the stock is more expensive than others in its industry. Return on equity has slightly decreased year over year. This implies a minor weakness in the organization. Silver Wheaton had been rated buy since Aug. 8.

Vasco Data Security (VDSI - Get Report), which designs hardware and software security systems, has been downgraded to hold. Robust revenue growth, a solid financial position and expanding profit margins are countered by a disappointing stock-price performance, unimpressive net income growth and disappointing return on equity. For the fourth quarter, revenues rose 24% year over year, but earnings per share fell to 9 cents from 13 cents in the same period. For 2008, the market expects an improvement in full-year EPS to 67 cents from 55 cents for 2007.

Vasco has no debt to speak of and a quick ratio of 2.62, which demonstrates an ability to cover short-term cash needs. Shares have tumbled 33% in the past year. Despite the heavy decline, this stock is still more expensive (when compared to its current earnings) than most other companies in its industry. Vasco Data Security had been rated buy since Ratings initiated coverage on March 10, 2006.

Jones Soda (JSDA), which makes beverages, has been downgraded to sell. For the fourth quarter, the company swung to an EPS loss of 39 cents from a profit of 8 cents in the 2006, and revenue fell 42% to $6 million in the same period. For 2008, the market expects an improvement in full-year EPS to 5 cents from a loss of 45 cents in 2007. Return on equity has greatly decreased year over year to -34% from 10%.

Jones shares have fallen 83% in the past year. In the future, the downward move could help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy. Jones Soda had been rated hold since Aug. 15.

Additional ratings changes from March 13 are listed below.

Ticker Company Name Change New Rating Former Rating
SCX STARRETT (L.S.) CO Upgrade Buy Hold
JSDA JONES SODA CO Downgrade Sell Hold
This article was written by a staff member of Ratings.

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JSDA $0.68 0.00%
AIMC $28.70 0.00%
HWAY $11.65 0.00%
SLW $20.95 0.00%
VDSI $17.33 0.00%


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