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TheStreet Open House

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 11.

Lancaster Colony (LANC), which makes consumer products for the retail, food service, floral, original equipment and aftermarket sectors, has been upgraded to buy. For the second quarter of 2008, revenue rose 4.5% year over year to $305.6 million, while earnings per share declined to 54 cents from 64 cents. For 2008, the market expects an improvement in full-year EPS to $2.16 from $2.05 in 2007.

The company's debt-to-equity ratio of 0.12 indicates successful management of debt, and its quick ratio of 1.12 illustrates the ability to avoid short-term cash problems. Net operating cash flow has increased 50% to $53.52 million from the year-ago quarter. In addition, return on equity has improved to 15% and exceeds the industry average. Lancaster Colony had been rated hold since June 29.

State Auto Financial (STFC), which through its subsidiaries writes personal and business lines of insurance, has been upgraded to buy. For the fourth quarter, revenue declined slightly year over year to $278.3 million. Net income fell to $41.7 million, or $1.01 a share, from $44.9 million, or $1.08 a share, a year ago.

The company's debt-to-equity ratio is very low at 0.13, implying successful management of debt levels. In addition, net operating cash flow has increased 19% to $44.50 million from the year-ago quarter. Its cash flow growth rate significantly exceeds the industry average. With a price-to-earnings ratio of 10.01, the stock is slightly cheaper than others in its sector. State Auto Financial had been rated hold since July 23, 2007.

Bois d'Arc Energy (BDE), which explores for, develops and produces oil and natural gas, has been upgraded to buy. For the fourth quarter of 2007, revenue leaped 51% year over year to $100.3 million, and earnings per share improved to 42 cents from 18 cents. This year, the market expects an improvement in full-year EPS to $1.58 from $1.18 this year. The company's debt-to-equity ratio is very low at 0.14, implying successful management of debt levels, and its quick ratio of 1.28 illustrates the ability to avoid short-term cash problems.

The gross profit margin for Bois d'Arc Energy is currently very high at 84%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 28% significantly outperformed against the industry average. Bois d'Arc Energy had been rated hold since March 18.

KB Home (KBH), a homebuilder, has been downgraded to sell. For the first quarter of 2008, the company swung to a net loss of $268.2 million, or $3.47 a share, from a profit of $27.5 million, or 14 cents a share, a year ago. Revenue declined 43% to $794.2 million over the same period. The company's debt-to-equity ratio of 1.38 is relatively high, suggesting a need for better debt management. Return on equity has greatly decreased year over year and trails the industry average.

Shares have tumbled 41% in the past year. 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 others in its industry. But due to other concerns, we feel the stock is still not a good buy right now. KB Home had been rated hold since Sept. 22, 2006.

Sovereign Bancorp (SOV) operates as the holding company for Sovereign Bank, which provides commercial banking services. The stock has been downgraded to sell. For the fourth quarter of 2007, revenue declined 19% year over year to $1.11 billion, and the company's per-share loss widened to $3.34 from 28 cents. Return on equity has greatly decreased from the year-ago quarter and trails both the industry average and that of the S&P 500.

Net operating cash flow has decreased 94% to $145.71 million. The gross profit margin is currently lower than desirable at 26%. Shares have fallen 64% in the past year. This decline could make the stock attractive down the road. Right now, however, we believe that it is too soon to buy. Sovereign Bancorp had been rated hold since May 8, 2007.

Additional ratings changes from April 11 are listed below.

Ticker Company Name Change New Rating Former Rating
CMT CORE MOLDING TECHNOLOGIES Downgrade Hold Buy
KBH KB HOME Downgrade Sell Hold
LANC LANCASTER COLONY CORP Upgrade Buy Hold
SOV SOVEREIGN BANCORP INC Downgrade Sell Hold
STFC STATE AUTO FINANCIAL CORP Upgrade Buy Hold
ACGY ACERGY SA Upgrade Buy Hold
HHGP HUDSON HIGHLAND GROUP INC Upgrade Hold Sell
BDE BOIS D ARC ENERGY INC Upgrade Buy Hold

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

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