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TSC Ratings' Upgrades, Downgrades

Each business day, 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 May 7.

Infosys (INFY), a technology services company, has been upgraded to buy. For the fourth quarter, revenue grew 32% year over year to $1.14 billion, while earnings per share increased to 54 cents from 45 cents. For 2008, the market expects an improvement in full-year EPS to $2.31 from $2.02 in 2007. The company has no debt to speak of, resulting in a debt-to-equity ratio of zero, which we consider a favorable sign. Its quick ratio of 5.29 clearly demonstrates an ability to cover short-term cash needs. At 42%, the gross profit margin is strong, and the net profit margin of 27% compares favorably with the industry average. Infosys had been rated hold since March 26.

Iron Mountain (IRM), which provides information protection and storage services, has been upgraded to buy. For the first quarter, revenue rose 19% year over year to $749.4 million, while earnings per share remained flat at 17 cents. For 2008, the market expects an improvement in full-year EPS to 78 cents from 75 cents in 2007. The company's gross profit margin is rather high at 54% and has increased from the year-ago quarter. However, its net profit margin of 4.5% significantly trails the industry average. The debt-to-equity ratio of 1.80 is below the industry average, suggesting that this level of debt is acceptable within the IT Services industry. The company's quick ratio of 1.02 is sturdy. The stock's rise in price has outperformed the performance of the S&P 500 over the past year, netting it a price-to-earnings ratio of 40.89. At this valuation, it trades at a premium to other stocks in its sector, but we feel that other strengths justify a buy rating. Iron Mountain had been rated hold since March 27.

TRW Automotive (TRW), which through its subsidiaries designs, manufactures and sells automotive systems, modules and components, has been upgraded to buy. For the first quarter, revenue increased 16% year over year to $4.14 billion, and earnings per share swung to a profit of 92 cents from a loss of 87 cents. Net operating cash flow has increased to negative $115 million. For 2008, the market expects an improvement in full-year EPS to $2.44 from 84 cents in 2007. With a price-to-earnings ratio of 10.54, the stock trades at a slight discount to its industry peers. TRW Automotive had been rated hold since Nov. 2, 2007.

Zumiez (ZUMZ), a mall-based specialty retailer that provides action sports-related apparel, footwear, equipment and accessories, has been upgraded to hold. Strengths such as revenue growth, a solid financial position and growth in earnings per share are countered by a disappointing stock-price performance and weak return on equity. For the fourth quarter, revenue grew 13% year over year to $126.6 million, and earnings per share climbed to 42 cents from 39 cents. The company has no debt to speak of, resulting in a debt-to-equity ratio of zero. To add to this, its quick ratio of 1.87 demonstrates an ability to cover short-term liquidity needs. At 42%, the gross profit margin is strong, and a net profit margin of 9.8% compares favorably to the industry average. Return on equity has decreased year over year to 16%. Shares have fallen 47% in the past year, netting the stock a price-to-earnings ratio of 24.05. Despite the decline in price, the stock still trades at a premium to others in its sector. Zumiez had been rated sell since Jan. 4.

THQ, Inc. (THQI), which develops and publishes video games, has been downgraded to sell. For the fourth quarter, revenue grew 8.7% year over year to $187 million, and the company swung to a loss of 52 cents a share from a profit of 8 cents a share in the year-ago quarter. For 2008, the market expects an improvement in full-year EPS to a profit of 5 cents from a loss of 56 cents. Return on equity has greatly decreased year over year and lags the industry average. This is a signal of major weakness within the corporation. At 18%, the gross profit margin is rather low. The negative net profit margin of 19% significantly trails the industry average. Shares have tumbled 41% in the past year. THQ, Inc., had been rated hold since Jan. 28.

Additional ratings changes from May 7 are listed below.

Ticker Company Name Change New Rating Former Rating
AIN Albany International Downgrade Hold Buy
ALTR Altera Upgrade Buy Hold
CWEI Clayton Williams Energy Upgrade Buy Hold
CDE Coeur d'Alene Mines Downgrade Hold Buy
ECLP Eclipsys Downgrade Hold Buy
EE El Paso Electric Upgrade Buy Hold
ESE ESCO Technologies Upgrade Buy Hold
GTSI GTSI Corp. Downgrade Sell Hold
HTCH Hutchinson Technology Downgrade Sell Hold
INFY Infosys Upgrade Buy Hold
IRM Iron Mountain Upgrade Buy Hold
MAYS J.W. Mays Upgrade Hold Sell
MINI Mobile Mini Upgrade Buy Hold
NSSC Napco Security Systems Upgrade Buy Hold
NL NL Industries Downgrade Sell Hold
NOBH Nobility Homes Upgrade Hold Sell
SXI Standex International Downgrade Hold Buy
THQI THQ Inc. Downgrade Sell Hold
UCFC United Community Financial Upgrade Buy Hold
VTIV inVentiv Health Upgrade Buy Hold
MXGL Max Capital Group Downgrade Hold Buy
EGO Eldorado Gold Upgrade Buy Hold
TXCO TXCO Resources Upgrade Buy Hold
TEC Teton Energy Upgrade Hold Sell
TRW TRW Automotive Upgrade Buy Hold
ZUMZ Zumiez Upgrade Hold Sell
CMFB Commercefirst Bancorp Upgrade Hold Sell
CF CF Industries Upgrade Buy Hold
TLVT Telvent Git Initiated Hold
BTE Baytex Energy Trust Upgrade Hold Sell
SE Spectra Energy Initiated Hold
CHQ Challenger Energy Initiated Hold
FSR Flagstone Reinsurance Holdings Initiated Hold
CPHL Castlepoint Holdings Initiated Sell

This article was written by a staff member of Ratings.

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