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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 18.

FirstMerit (FMER) is the holding company for FirstMerit Bank, which provides banking, fiduciary, financial, insurance and investment banking services. The stock has been upgraded to buy. For the fourth quarter, net income increased to $31.5 million from $6.1 million a year ago. Revenue grew 1% year over year to $208 million, and earnings per share rocketed to 39 cents from 7 cents.

The company's gross profit margin is high at 61%, but its net profit margin of 15% trails the industry average. Net operating cash flow has increased 2.9% to $50 million from the year-ago quarter. Shares have not posted much net change in price from where they stood a year ago. Looking ahead, unless broad bear market conditions prevail, we see more upside potential for this stock. FirstMerit had been rated hold since Jan. 25, 2007.

Graco (GGG), a provider of fluid handling solutions to the manufacturing, processing, construction and maintenance sectors, has been upgraded to buy. For the fourth quarter, revenue rose 0.9% year over year to $205.2 million, and earnings per share climbed to 56 cents from 52 cents. The company's debt-to-equity ratio, 0.52, is below the industry average, implying successful management of debt. Its quick ratio of 1.16 illustrates an ability to avoid short-term cash problems.

Return on equity greatly increased from the year-ago quarter to 62%. This is a signal of significant strength within the corporation. Gross profit margin is high at 57%, and net profit margin of 17% exceeds the industry average. Net operating cash flow has increased 42% to $54.82 million a year ago. Graco had been rated hold since Jan. 31.

Hugoton Royalty Trust (HGT), an express trust holding 80% net profit interests in natural gas-producing working interest properties owned and operated by XTO Energy (XTO), has been upgraded to buy. For the fourth quarter, net income increased 4.2% year over year to $14.6 million, and revenue rose 4.1% to $14.6 million. Earnings per share climbed to 36 cents from 35 cents in the same period.

With no debt to speak of, Hugoton Royalty Trust has a debt-to-equity ration of zero, which we consider a favorable sign. In addition, its quick ratio of 30.88 demonstrates an ability to cover short-term cash needs.

The company's gross profit is high at 100%, and its net profit margin of 100% significantly outperformed its industry. The stock has risen over the past year, outpacing the S&P 500. We feel the stock still has good upside potential despite its nice gain. Hugoton Royalty Trust had been rated hold since Oct. 22.

Precision Drilling Trust (PDS), which provides contract drilling as well as completion and production services to oil and natural gas companies, has been upgraded to buy. For the fourth quarter, revenue fell 24% to $248.7 million, and earnings per share declined to 71 cents from $1.01. The company's debt-to-equity ratio is very low at 0.10, implying very successful management of debt. Its quick ratio of 1.88 demonstrates an ability to cover short-term liquidity needs.

At 49%, the gross profit margin is strong, and the net profit margin of 36% exceeds the industry average. With a price-to-earnings ratio of 9.75, the stock trades at a significant discount to others in its industry. Precision Drilling Trust had been rated hold since Aug. 8.

Mercury General (MCY), which through its subsidiaries writes private-passenger and commercial automobile insurance, has been downgraded to hold. Strengths such as a solid financial position, notable return on equity and an attractive valuation are balanced by poor profit margins, weak operating cash flow and a disappointing stock-price performance.

The company's debt-to-equity ratio is very low at 0.07, implying successful management of debt levels. Return on equity has improved slightly year over year to 13% and exceeds the industry average. This can be construed as a modest strength in the organization. On the other hand, gross profit margin is extremely low at 8.1%, and net profit margin of 5.7% trails the industry average. Net operating cash flow has decreased 86% to $9.7 million from the year-ago quarter. Mercury General had been rated buy since TheStreet.com Ratings initiated coverage on April 17, 2006.

Please note, the "Upgrades, Downgrades" article from Friday, April 18, listed Aura Systems (AUSI) as initiated with a sell rating. This rating was produced in error, and was the result of a data incompatibility issue. We are removing it from our coverage universe until further notice.

Additional ratings changes from April 18 are listed below.

Ticker Company Name Change New Rating Former Rating
ATRM AETRIUM INC Downgrade Hold Buy
FMER FIRSTMERIT CORP Upgrade Buy Hold
GGG GRACO INC Upgrade Buy Hold
HGT HUGOTON ROYALTY TRUST Upgrade Buy Hold
MCY MERCURY GENERAL CORP Downgrade Hold Buy
NOIZ MICRONETICS INC Downgrade Hold Buy
PHII PHI INC Upgrade Buy Hold
PDS PRECISION DRILLING TRUST Upgrade Buy Hold
PBKS PROVIDENT BANKSHARES CORP Downgrade Sell Hold
NZT TELECOM CORP OF NEW ZEALAND Downgrade Hold Buy
CXG CNX GAS CORP Upgrade Buy Hold

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

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