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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 23.

Universal Truckload (UACL - Get Report), a trucking company, has been upgraded to buy.

For the fourth quarter, revenue increased 4.7% year over year to $171.5 million, while earnings pear share declined to 30 cents from 33 cents. For 2008, the market expects an improvement in full-year EPS to $1.20 from $1.11 in 2007. The company's debt-to-equity ratio is very low at 0.01, and its quick ratio of 2.27 demonstrates strong liquidity. Its gross profit margin is rather low at 22%, and the net profit margin of 2.80% trails the industry average. With a price-to-earnings ratio of 17.94, the stock trades at a similar valuation to others in its industry. Universal Truckload had been rated hold since Nov. 14, 2006.

Delta Petroleum (DPTR), which explores, acquires, develops, produces and sells natural gas and crude oil, has been upgraded to hold. Strengths such as a solid stock-price performance, revenue growth and good cash flow from operations are countered by deteriorating net income, disappointing return on equity and poor debt management.

For the fourth quarter, revenue rose 21% year over year to $45.1 million, while the company's per-share loss widened to 53 cents from 22 cents. Gross profit margin is high at 62%, while a negative net profit margin of 67% is in line with the industry average. Return on equity has greatly decreased from the year-ago quarter to negative 32% and significantly trails the industry average. This is a signal of major weakness within the corporation.

Shares have risen 30% in the past year. We do not recommend additional investment in this stock despite its gains in the past year. Delta Petroleum had been rated sell since May 15.

Brookfield Homes (BHS), which designs, builds and markets homes, has been upgraded to hold. Expanding profit margins are held back by a disappointing stock-price performance, feeble growth in earnings per share and deteriorating net income.

For the fourth quarter, revenue fell 40% year over year to $197.7 million, and earnings per share swung to a loss of 91 cents from a profit of $2.19. The company's gross profit margin is lower than desirable at 33%, and its negative net profit margin of 12% significantly lags the industry average. Net operating cash flow has declined 7.3% to $86.32 million from the year-ago quarter. With a price-to-earnings ratio of 26.63, the stock is expensive compared with others in its sector. Brookfield Homes had been rated sell since Oct. 31.

Cherokee (CHKE - Get Report), which markets and licenses footwear, apparel and accessories, has been downgraded to hold. Strengths such as a solid financial position, expanding profit margins and notable return on equity are balanced by deteriorating net income, a generally disappointing stock-price performance and feeble EPS growth.

With no no debt to speak of, Cherokee has a debt-to-equity ratio of zero, which we consider a favorable sign. Its quick ratio of 2.29 demonstrates the ability to cover short-term liquidity needs. A gross profit margin is rather high at 60%, and a net profit margin of 32% significantly outperformed the industry average.

For the fourth quarter, revenue declined 4.9% year over year to $8.7 million, and earnings per share declined to 31 cents from $2.33. Shares have tumbled 40% in the past year. The decline has netted the stock a price-to-earnings ratio of 15.10, which makes it cheaper than others in its industry. Despite the cheap valuation, due to other concerns, we feel the stock is still not a good buy right now. Cherokee had been rated buy since March 26.

Western Union (WU - Get Report), a money transfer company, has been downgraded to sell. For the first quarter, net income grew 7.2% year over year to $207 million, and earnings per share improved to 27 cents from 25 cents. For 2008, the market expects an improvement in full-year EPS to $1.27 from $1.11 for 2007.

The company's gross profit margin of 42% is strong, and its net profit margin of 16% compares favorably to the industry average. Net operating cash flow has increased 11% to $318 million from the year-ago quarter. Shares are off 5.42% from their price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time. Western Union had been rated hold since Feb. 1.

Additional ratings changes from April 23 are listed below.

Ticker Company Name Change New Rating Former Rating
CHKE Cherokee Downgrade Hold Buy
DPTR Delta Petroleum Upgrade Hold Sell
MTRX Matrix Service Co. Upgrade Buy Hold
BHS Brookfield Homes Upgrade Hold Sell
QNTA Quanta Capital Holdings Downgrade Sell Hold
UACL Universal Truckload Services Upgrade Buy Hold
WU Western Union Downgrade Sell Hold

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

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