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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 29.

Brady Corp. (BRC), which manufactures and markets identification systems and specialty products, has been upgraded to buy. For the second quarter of fiscal 2008, revenue rose 13% year over year to $364.1 million, and earnings per share climbed to 48 cents from 36 cents. Net income jumped 35% to $26.7 million. Net operating cash flow has more than doubled to $53.96 million when compared to the same quarter last year. The company's cash flow growth rate vastly surpasses the industry average. The company's gross profit margin is rather high at 52% and has increased from the year-ago quarter. However, its net profit margin of 7.3% trails the industry average. With a price-to-earnings ratio of 15.81, the stock trades at a discount to others in its sector. Brady Corp. had been rated hold since March 4.

Martek Biosciences (MATK), which develops and commercializes novel products from microalgae, fungi and microbes, has been upgraded to buy. For the first quarter, revenue rose 18% year over year to $82.9 million, and earnings per share climbed to 26 cents from 8 cents. Net income climbed to $8.67 million from $2.75 million in the same period. For 2008, the market expects an improvement in full-year EPS to $1.03 from 97 cents in 2007. The company's debt-to-equity ratio is very low at 0.02, implying successful management of debt. Its quick ratio of 1.69 demonstrates an ability to cover short-term liquidity needs. Shares have surged 65% in the past year, but with a price-to-earnings ratio of 31.60, the stock still trades at a discount to its industry peers. Martek Biosciences had been rated hold since TheStreet.com Ratings initiated coverage on April 28, 2006.

Rent-A-Center (RCII), which rents household durables, has been upgraded to buy. For the first quarter, revenue increased slightly year over year to $756.6 million, and earnings per share rose to 54 cents from 21 cents. Net income climbed to $36.4 million from $15.1 million. For 2008, the market expects an improvement in full-year EPS to $2.22 from $1.08. The company's return on equity has improved slightly to 9.9% from 8% a year ago. This can be construed as a modest strength in the organization. Nevertheless, its return on equity trails the industry average. Rent-A-Center had been rated hold since Aug. 7.

D.R. Horton (DHI), a homebuilder, has been upgraded to hold. Strengths such as its good cash flow from operations and a solid financial position are countered by deteriorating net income, disappointing return on equity and poor profit margins. For the first quarter, revenue fell 39% year over year to $1.74 billion, and earnings per share swung to a loss of 41 cents from a profit of 35 cents. Net operating cash flow has increased 89% year over year to $557.7 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 57.92%. Return on equity has greatly decreased since the year-ago quarter and trails the industry average. The company's gross profit margin is extremely low at 3%, and its negative net profit margin of 7.4% trails the industry average. D.R. Horton had been rated sell since Nov. 1.

Evergreen Solar (ESLR), which makes solar power products, has been upgraded to hold. Strengths such as revenue growth, a solid financial position and compelling improvement in net income are held back by poor profit margins and a disappointing stock-price performance. For the first quarter, revenue leaped 63% year over year to $23 million, and earnings per share climbed to breakeven from a loss of 9 cents. For 2008, the market is expecting the company's full-year per-share loss to widen to 24 cents from 21 cents in 2007. The company's debt-to-equity ratio is very low at 0.16, implying very successful management of debt. Its quick ratio of 4.78 demonstrates an ability to cover short-term cash needs. Gross profit margin is currently lower than desirable at 34%, and its negative net profit margin of 0.1% significantly underperforms the industry average. Shares have fallen 18% in the past year. The fact that the stock is now selling for less than others in its industry in relation to its current earnings does not justify a buy rating at this time. Evergreen Solar had been rated sell since March 17.

Additional ratings changes from April 29 are listed below.

Ticker Company Name Change New Rating Former Rating
ALG Alamo Group Upgrade Buy Hold
BRC Brady Corp. Upgrade Buy Hold
CCOM Colonial Commercial Corp. Downgrade Sell Hold
DHI D.R. Horton Upgrade Hold Sell
ESLR Evergreen Solar Upgrade Hold Sell
KFY Korn/Ferry International Upgrade Buy Hold
MATK Martek Biosciences Upgrade Buy Hold
MGRC McGrath Rentcorp Upgrade Buy Hold
RCII Rent-A-Center Upgrade Buy Hold
RIMG Rimage Corp. Downgrade Hold Buy
RYL Ryland Group Upgrade Hold Sell
SCHL Scholastic Corp. Downgrade Hold Buy
SPEC Spectrum Control Downgrade Hold Buy
TKLC Tekelec Upgrade Buy Hold
TACT Transact Technologies Upgrade Hold Sell
WOR Worthington Industries Upgrade Buy Hold
AWSR America West Resources Initiated Sell
CAPE Cape Fear Bank Corp. Downgrade Sell Hold
ACW Accuride Upgrade Hold Sell
AFFY Affymax Initiated Sell
AIMC Altra Holdings Upgrade Hold Sell
FEED AgFeed Industries Initiated Hold

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

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