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TheStreet Open House

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 generated on March 24.

Old National Bancorp (ONB), the holding company for Old National Bank, which provides financial services to individuals and commercial customers, has been upgraded to buy. For the fourth quarter, net income grew 26% year over year to $22 million and revenue increased 2.1% to $155.3 million. Earnings per share improved to 34 cents from 27 cents in the same period. For 2008, the market expects an improvement in full-year EPS to $1.15 from $1.14 in 2007. The company's gross profit margin is rather high at 65%, and its net profit margin of 14.20% exceeds the industry average.

Growth in the stock's price has outperformed the rise in the S&P 500 over the past year, netting shares a price-to-earnings ratio (P/E) of 16.89, which is more expensive than the industry average. We feel, however, that other strengths justify the premium. Old National Bancorp had been rated hold since Aug. 8, 2006.

99 Cents Only Stores (NDN) has been upgraded to hold. Strengths such as revenue growth, a solid financial position and an increase in net income are countered by a disappointing stock-price performance, weak return on equity and feeble growth in earnings per share. For its fiscal third quarter of 2007, revenue increased 7.6% year over year to $325 million, and earnings per share improved by a penny to 14 cents. The company's debt-to-equity ratio is very low at 0.02, and its quick ratio of 1.11 is adequate, indicating an ability to avoid short-term cash problems. At 40%, the company's gross profit margin is strong, but its net profit margin of 2.9% trails the industry average.

Shares are down 27% in the past year, netting the stock a price-over-earnings ratio (P/E) of 107.6, making the stock is still much more expensive than others in its industry. 99 Cents Only Stores had been rated sell since Nov. 14.

OSI Pharmaceuticals (OSIP), which discovers, develops and commercializes molecular targeted therapies for oncology, diabetes and obesity, has been upgraded to hold.

Robust revenue growth, notable return on equity and reasonable valuation levels are held back by weak profit margins and poor debt management. For the fourth quarter, revenue rose 22% year over year to $84.3 million, and earnings per share rose to 29 cents from break-even.

The stock's rise over the past year has outperformed the S&P 500. It has a price-to-earnings ratio of 22.99, which makes it cheaper than others in its industry. The company's debt-to-equity ratio of 1.91 is quite high, but its quick ratio of 1.56 is strong; this demonstrates the ability to cover short-term cash needs. OSI's gross profit margin is lower than desirable at 26%, and its net profit margin of 12% trails the industry average. The stock had been rated sell since TheStreet.com Ratings initiated coverage on March 20, 2006.

Herman Miller (MLHR), which researches, designs, manufactures and distributes interior furnishings, has been downgraded to hold. Impressive revenue growth, a solid financial position and strong EPS growth are balanced by weak operating cash flow, poor profit margins and a disappointing stock-price performance. For the third quarter, revenue increased 2.2% year over year to $495.4 million, and EPS jumped to 65 cents from 50 cents. The company's quick ratio of 1.09 is sturdy.

Herman Miller's gross profit margin is low at 34%, but its net profit margin of 7.7% is above the industry average. Net operating cash flow has decreased 47% year over year to $35.5 million and is much lower than the industry average. The stock had been rated buy since Dec. 28.

Palm (PALM), which provides mobile computing solutions worldwide, has been downgraded to sell. Over the past two years, earnings per share have declined. For the third quarter, EPS fell year over year to a loss of 30 cents from a profit of 11 cents. For 2008, the market is expecting a contraction of in full-year EPS to a loss of 23 cents from a profit of 54 cents in 2007. Return on equity has greatly decreased year over year and trails the industry average. The company's gross profit margin, at 32%, is lower than desirable.

Shares have tumbled by 75% in the past year. Turning toward the future, the decline should not necessarily be interpreted as a negative; it could make the stock attractive down the road. Right now, however, we believe that it is too soon to buy. Palm had been rated hold since Oct. 2.

Additional ratings changes from March 24 are listed below.

Ticker Company Name Change New Rating Former Rating
NDN 99 CENTS ONLY STORES Upgrade Hold Sell
ALDA ALDILA INC Downgrade Hold Buy
AFOP ALLIANCE FIBER OPTIC PRODUCT Downgrade Hold Buy
BDOG BIG DOG HOLDINGS INC Downgrade Sell Hold
CTB COOPER TIRE & RUBBER CO Upgrade Buy Hold
LUB LUBYS INC Downgrade Hold Buy
MLHR MILLER (HERMAN) INC Downgrade Hold Buy
ONB OLD NATIONAL BANCORP Upgrade Buy Hold
OSIP OSI PHARMACEUTICALS INC Upgrade Hold Sell
PALM PALM INC Downgrade Sell Hold
PRCP PERCEPTRON INC Upgrade Buy Hold
RTLX RETALIX LTD Downgrade Sell Hold
PSPT PEOPLESUPPORT INC Downgrade Hold Buy
CMED CHINA MEDICAL TECHNOLGS -ADR Downgrade Hold Buy
SMBL SMART BALANCE INC Upgrade Hold Sell
KBR KBR INC Initiated Hold
IPGP IPG PHOTONICS CORP Downgrade Sell Hold

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

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