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TSC Ratings' Upgrades, Downgrades

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 April 10.

Petroleum Development (PETD), which develops, produces and markets natural gas and oil, has been upgraded to buy. For the fourth quarter, revenue grew 40% year over year to $95 million, and earnings per share improved by a penny to 55 cents. For 2008, the market expects an improvement in full-year EPS to $3.18 from $2.23 in 2007. Net operating cash flow increased 20% to $93.10 million from the year-ago quarter.

The company's gross profit margin is rather high at 50%, but its net profit margin of 8.6% trails the industry average. The stock has risen 40% over the past year, beating the S&P 500. The rise in share price has resulted in a price-to-earnings ratio (P/E) of 33.17, which represents a premium over other stocks in the space. We feel, however, that other strengths justify the higher price levels.

Ship Finance (SFL), which owns and operates vessels and offshore related assets, has been upgraded to buy. The company's gross profit margin is very high at 79% and its net profit margin of 43% significantly outperforms the industry average. Net operating cash flow has increased 16% to $41.4 million from the year-ago quarter.

For the fourth quarter, revenue dropped 4.3% to $122.3 million, and earnings per share declined 8.9% to 72 cents. The company has suffered a declining pattern of earnings per share over the past two years. However, for 2008, the market expects an improvement in full-year EPS to $2.39 from $2.30 in 2007. After a year of fluctuations, share price is about where it was a year ago. This has resulted in a P/E of 12.12, which makes the cheaper than the industry average. Ship Finance had been rated hold since July 27.

Humana (HUM), a provider of health and supplemental benefit plans for employer groups, government benefit programs and individuals, has been downgraded to hold. Strengths such as revenue growth, a solid financial position and compelling improvement in net income are balanced by weak operating cash flow, a disappointing stock-price performance and poor profit margins.

For the fourth quarter, revenue rose 12% year over year to $6.34 billion, and earnings per share rose to $1.43 from 92 cents. The company's debt-to-equity ratio, 0.49, is low, implying successful management of debt. Its quick ratio of 1.08 is adequate.

Return on equity has improved slightly to 21% from the year-ago period. Shares have fallen 30% in the past year, resulting in a P/E of 9, which makes the stock cheaper than others in its sector. Because of other concerns, however, we feel the stock is still not a good buy right now. Net operating cash flow has fallen to negative $189.83 million, and the firm's growth rate is much lower than the industry average. Humana had been rated buy since TheStreet.com Ratings initiated coverage on April 10, 2006.

International Paper (IP), a paper and packaging company, has been downgraded to hold. Strong revenue growth, a solid financial and good cash flow from operations are countered by feeble EPS growth and a disappointing return on equity.

For the fourth quarter, revenue increased 9.7% year over year to $5.84 billion, and earnings per share declined to 80 cents from $4.53. For 2008, the market is expecting a contraction of 12% in full-year EPS to $2.48 from $2.80 this year. The company's debt-to-equity ratio, at 0.76, is less than the industry average, implying successful debt management, and a quick ratio of 1.06 illustrates the ability to avoid short-term cash problems.

Shares have tumbled 26% in the past year, netting the stock a P/E of 9.88, which is well below the industry average. Because of other concerns, however, we do not believe the stock is a good buy right now. International Paper had been rated buy since Feb. 2, 2007.

Relm Wireless (RWC), a maker of wireless communications products for government, public safety, business and industrial markets, has been downgraded to sell. For the fourth quarter, earnings per share swung to a loss of 3 cents from 3 cents' profit a year ago. The company has reported a trend of declining earnings per share over the past two years. Net income has significantly decreased to a loss of $410,000 from a profit of $410,000.

Return on equity is 6.6%, a rate that lags the industry average. Net operating cash flow has significantly decreased to $110,000 from the year-ago quarter and also trails the industry average. Shares have tumbled 56% in the past year, worse than the S&P 500's performance. The decline in price has netted the stock a P/E of 15, which is lower than the sector average. Because of other concerns, however, we feel the stock is still not a good buy right now. Relm Wireless had been rated hold since Jan. 15.

Additional ratings changes from April 10 are listed below.

Ticker Company Name Change New Rating Former Rating
HUM Humana Downgrade Hold Buy
IP International Paper Downgrade Hold Buy
MBWM Mercantile Bank Downgrade Sell Hold
MGAM Multimedia Games Downgrade Sell Hold
PETD Petroleum Development Corp. Upgrade Buy Hold
RWC Relm Wireless Downgrade Sell Hold
UFYC Unify Corp. Upgrade Hold Sell
SFL Ship Finance International Upgrade Buy Hold

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

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