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TheStreet Open House

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 Monday, May 12.

Dollar Tree (DLTR), which operates discount variety stores, has been upgraded to buy. For the fourth quarter, revenue declined 1.5% year over year to $1.3 billion, while earnings per share climbed to $1.04 from 96 cents.

For 2008, the market expects an improvement in full-year EPS to $2.30 from $2.13 in 2007. Return on equity has improved slightly to 20%, which exceeds the industry average. This can be construed as a modest strength in the organization. The company's debt-to-equity ratio is very low at 0.27, implying very successful management of debt levels, but its quick ratio of 0.20 demonstrates weak liquidity. At, 39% Dollar Tree's gross profit margin is strong. Its net profit margin of 7.3% compares favorably with the industry average. Dollar Tree had been rated hold since Jan. 2.

Frontier Oil (FTO), which refines crude oil and markets refined petroleum products, has been downgraded to hold. Strengths such as revenue growth, a solid financial position and attractive valuation levels are balanced by unimpressive growth in net income, poor profit margins and a disappointing stock-price performance.

For the first quarter, revenue grew 13% year over year to $1.19 billion, while earnings per share declined to 44 cents from 68 cents. The debt-to-equity ratio is very low at 0.15, implying successful management of debt levels. However, Frontier's gross profit margin is extremely low at 8.4% and has decreased from the same quarter of the previous year. Its net profit margin of 3.9% trails that of the industry average. With a price-to-earnings ratio of 5.83, the stock trades at a substantial discount to its sector peers. Frontier Oil had been rated buy since TheStreet.com Ratings initiated coverage on May 9, 2006.

Phoenix Companies (PNX), which through its subsidiaries provides life insurance, annuity and investment products, has been downgraded to hold. Strengths such as a solid financial position are held back by a disappointing stock-price performance, deteriorating net income and disappointing return on equity. For the first quarter, revenue declined 13% year over year to $574 million, while earnings per share swung to a loss of 17 cents from a profit of 43 cents.

For 2008, the market is expecting a contraction in full-year EPS to $1.08 from $1.10 in 2007. The low debt-to-equity ratio of 0.33 nonetheless exceeds the industry average, inferring debt management may need to be evaluated further. Return on equity has slightly decreased from the year-ago quarter and trails the industry average. This implies a minor weakness in the organization. Shares have tumbled 35% in the past year. Despite the heavy decline, the stock, with a price-to-earnings ratio of 20.62, trades at a premium to most others in its industry. Phoenix Companies had been rated buy since April 21.

American International Group (AIG), which provides insurance and financial services, has been downgraded to sell. For the first quarter, revenue fell 54% year over year to $14.16 billion, and earnings per share swung to a loss of $3.09 from a profit of $1.58. The debt-to-equity ratio is very high at 2.71, implying very poor management of debt levels.

Return on equity has greatly decreased from the year-ago quarter and lags the industry average. This is a signal of major weakness within the corporation. Net operating cash flow has declined marginally 3.9% to $8.29 billion. Shares have tumbled 44% in the past year. The sharp decline makes the stock cheaper than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now. American International Group had been rated hold since Nov. 21.

Griffon Corp. (GFF), which operates as a manufacturing company, has been downgraded to sell. For the second quarter of fiscal 2008, revenue declined 13% year over year to $320.4 million, and earnings per share swung to a loss of 42 cents from a profit of 3 cents. For 2008, the market is expecting a contraction in full-year EPS to 22 cents from 74 cents in 2007.

Return on equity has greatly decreased since the year-ago quarter and trails the industry average. This is a signal of major weakness within the corporation. Gross profit margin is rather low at 23% and has decreased from the year-ago quarter. A negative net profit margin of 6.7% trails the industry average. Shares have dropped 61% in the past year. This could help make the stock valuable to investors in the future. However, for now, we do not think the stock is a good buy. Griffon Corp. had been rated hold since May 8, 2007.

Additional ratings changes from May 12 are listed below.

Ticker Company Name Change New Rating Former Rating
AIG American International Group Downgrade Sell Hold
BSDM BSD Medical Upgrade Hold Sell
CALD Callidus Software Upgrade Hold Sell
DLTR Dollar Tree Upgrade Buy Hold
FTO Frontier Oil Downgrade Hold Buy
GFF Griffon Corp. Downgrade Sell Hold
PEGA Pegasystems Upgrade Buy Hold
PNX Phoenix Companies Downgrade Hold Buy
SCIL Scientific Learning Downgrade Sell Hold
VVUS Vivus Downgrade Sell Hold

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

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