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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 15.

Allied Waste (AW), which operates as a nonhazardous solid waste management company, has been upgraded to buy. For the fourth quarter, revenue increased 3.7% year over year to $1.52 billion, and earnings per share climbed to 27 cents from breakeven. For 2008, the market expects an improvement in full-year EPS to 92 cents from 70 cents in 2007.

Net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Commercial Services & Supplies industry. Net income increased to $115.3 million from $9.8 million. At 39%, the gross profit margin is strong, and the net profit margin of 7.6% is above that of the industry average. With a price-to-earnings ratio of 16.09, the stock is cheaper than others in its sector. Allied Waste had been rated hold since Dec. 20.

Delhaize (DEG), which operates retail food supermarkets in North America, Europe and Southeast Asia, has been upgraded to buy. For the fourth quarter, revenue grew 3.8% to $7.44 billion, driven by comparable store sales growth and a higher number of stores. An improved sales mix helped improve gross profit margin by 18 basis points to 28.20%, and operating margin widened 170 basis points to 5.49%. Consequently, earnings climbed 8.9% to $177.99 million, or $1.76 a share. Return on assets widened 86 basis points to 4.65%. Meanwhile, the debt-to-equity ratio improved to 0.73 from 0.88, on the back of reduced debt and increased equity by 3.4% and 15.4%, respectively. The interest coverage ratio improved to 4.52 from 3.68, triggered by lower interest expense.

There are some risks to the buy rating. Delhaize derives the majority of its revenue from the U.S. Any further weakening of the U.S. dollar against the euro may reduce the top line. Moreover, a slowdown in the U.S economy and a decrease in consumer spending may negatively affect sales growth in the upcoming quarters. Delhaize had been rated hold since Oct. 5.

Rockwood Holdings (ROC), which makes and markets specialty chemicals and advanced materials for industrial and commercial markets, has been upgraded to buy. For the fourth quarter, revenue grew 17% year over year to $807.2 million, and earnings per share improved to 24 cents from 7 cents. For 2008, the market expects an improvement in full-year EPS to $2.11 from $1.16 for 2007. Net income increased to $119.1 million from $4.5 million in the year-ago quarter.

At 37%, the gross profit margin is strong, and the net profit margin of 15% exceeds the industry average. The stock's rise in price has outperformed the S&P 500 over the past year. Although other factors naturally played a role, the company's strong earnings growth was key. We believe this stock still has good upside potential despite its nice rise. Rockwood Holdings had been rated hold since Jan. 16.

Nustar (NSH) holds interest in NuStar Energy, which transports, terminals and stores crude oil and refined product. The stock has been upgraded to hold. Strengths such as good cash flow from operations, expanding profit margins and a solid financial position are countered by a decline in the stock price during the past year and unimpressive growth in net income.

Net operating cash flow has increased 18% year over year to $17 million to modestly surpass the industry average cash flow growth rate. The company's gross profit margin is very high at 100%, and its net profit margin of 96% significantly outperformed against the industry average.

The debt-to-equity ratio is very low at 0.01, implying very successful management of debt levels. However, a quick ratio of 0.91 is somewhat weak and could be cause for future problems. Net income has fallen 11% year over year to $9.24 million. Shares are off 8.3% in the past year. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. Nustar had been rated sell since Aug. 15.

Argo Group (AGII), which through its subsidiaries underwrites specialty insurance and reinsurance products in the property and casualty market, has been downgraded to hold. Strengths such as revenue growth, a solid financial position and an attractive valuation are weighed down by unimpressive net-income growth, disappointing return on equity and poor profit margins.

For the fourth quarter, revenue increased 9.2% year over year to $265.4 million, while earnings per share declined to 79 cents from $1.42. Net income decreased by 25% to $23.5 million in the same period. The company's debt-to-equity ratio is very low at 0.27, implying successful management of debt levels. Return on equity has fallen to 5.6% from 12% in the year-ago quarter. This is a clear sign of weakness within the company. Argo Group had been rated buy since Feb. 15.

Additional ratings changes from April 15 are listed below.

Ticker Company Name Change New Rating Former Rating
ANS AIRNET SYSTEMS INC Upgrade Hold Sell
AW ALLIED WASTE INDUSTRIES INC Upgrade Buy Hold
AGII ARGO GROUP INTL HOLDINGS LTD Downgrade Hold Buy
BRID BRIDGFORD FOODS CORP Downgrade Sell Hold
ACFN ACORN ENERGY INC Downgrade Hold Buy
FUR WINTHROP REALTY TRUST Downgrade Sell Hold
HBIO HARVARD BIOSCIENCE INC Upgrade Buy Hold
LDL LYDALL INC Upgrade Buy Hold
MVCO MEADOW VALLEY CORP Downgrade Hold Buy
PNNW PENNICHUCK CORP Downgrade Hold Buy
PHIIK PHI INC Upgrade Buy Hold
SEAC SEACHANGE INTERNATIONAL INC Upgrade Hold Sell
DEG DELHAIZE GROUP - ETS DLHZ FR Upgrade Buy Hold
NGMC NEXT GENERATION MEDIA CORP Downgrade Sell Hold
ROC ROCKWOOD HOLDINGS INC Upgrade Buy Hold
NSH NUSTAR GP HOLDINGS LLC Upgrade Hold Sell
VPFG VIEWPOINT FINANCIAL GROUP Initiated Hold
OPTT OCEAN POWER TECHNOLOGIES INC Initiated Sell
RRST RRSAT GLOBAL COMM NTWRK LTD Downgrade Sell Hold
CNCTU 180 CONNECT INC Initiated Sell

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

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