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TSC Ratings' Stock Upgrades, Downgrades: Vale, Velcro

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 Tuesday, May 20.

Vale (RIO), a diversified metals and mining company, has been upgraded to buy. For the fourth quarter, revenue increased 19% year over year to $9.35 billion, and earnings per share climbed to 57 cents from 35 cents. For 2008, the market expects an improvement in full-year EPS to $6.36 from $2.35 in 2007.

Return on equity has improved from the year-ago quarter to 35% and exceeds the industry average. This can be construed as a modest strength in the organization. Shares have surged 93% over the past year, outperforming the rise in the S&P 500. We believe the stock should continue to move higher even though it has already enjoyed a very nice gain in the past year. Vale had been rated hold since March 3.

Velcro Industries (VELC), a holding company for the Velcro Group that makes and markets Velcro and Texacro fasteners, has been upgraded to buy. For the first quarter, revenue increased 1.6% year over year to $68.7 million, while earnings per share dropped to 24 cents from 26 cents. Return on equity has improved slightly from the year-ago quarter to 10% but trails the industry average. The company's gross profit margin is extremely low 5.6%, but its net profit margin of 10% exceeds the industry average.

Shares have not marked a net change in value over the past year, netting the stock a price-to-earnings ratio of 17.43. At this valuation, shares are slightly cheaper than others in the industry. Velcro Industries had been rated hold since Jan. 17, 2007.

Bronco Drilling (BRNC), a provider of contract land drilling and workover services to oil and gas companies, has been upgraded to buy. For the first quarter, revenue declined 21% year over year to $62.3 million, and earnings per share slipped to 31 cents from 44 cents. The company's debt-to-equity ratio is very low at 0.18, implying successful management of debt levels. Its quick ratio of 0.65, however, displays weak liquidity.

At 39%, the gross profit margin is strong, but the net profit margin of 13% trails the industry average. Shares have outpaced the S&P 500 in the past year. Despite the increase in share value, the stock still sports a price-to-earnings ratio of 13.62, which makes it cheaper than others in its industry. We feel there is further upside in this name despite the nice gains it has made in the past year. Bronco Drilling had been rated hold since Dec. 11.

Diamond Foods (DMND), a branded food company, has been downgraded to hold. Strengths such as its growth in earnings per share and good cash flow from operations are balanced by disappointing return on equity and poor profit margins. For the second quarter of fiscal 2008, revenue declined 6.9% year over year to $133.8 million, and earnings per share rose to 17 cents from 13 cents. For 2008, the market expects an improvement in full-year EPS to 87 cents from 54 cents in 2007.

The company's gross profit margin is rather low at 18%, and its net profit margin of 2% trails the industry average. Return on equity has slightly decreased from the same quarter one year prior to 5.6% and trails the industry average. Shares have risen in the past year, outperforming the S&P 500. This climb has netted the stock a price-to-earnings ratio of 40.65, which places it at a substantial premium to others in its sector. Diamond Foods had been rated buy since May 6.

Tredegar (TG), a maker of plastic films, elastics and laminate materials for personal and household care, has been downgraded to hold. Strengths including a solid financial position are countered by disappointing stock-price performance, feeble growth in earnings per share and deteriorating net income. For the first quarter, revenue declined 19% year over year to $228.5 million, and earnings per share slipped to 11 cents from 26 cents.

For 2008, the market is expecting a 16% contraction in full-year EPS to 76 cents. The company's debt-to-equity ratio is very low at 0.12, implying successful management of debt levels. Its quick ratio of 1.53 demonstrates an ability to cover short-term liquidity needs. The gross profit margin is rather low at 18% and the net profit margin of 1.3% has declined from the year-ago quarter. With a price-to-earnings ratio of 19.31, the stock still trades at a premium to others in its industry. Tredegar had been rated buy since April 7.

Additional ratings changes from May 20 are listed below.

Ticker Company Name Change New Rating Former Rating
ABG Asbury Automotive Group Upgrade Buy Hold
AMR AMR Corp. Downgrade Sell Hold
BRNC Bronco Drilling Upgrade Buy Hold
CTRN Citi Trends Upgrade Hold Sell
DMND Diamond Foods Downgrade Hold Buy
DVR Cal Dive International Upgrade Hold Sell
FCFS First Cash Financial Services Upgrade Buy Hold
HRLY Herley Industries Upgrade Hold Sell
IBKC IberiaBank Corp. Upgrade Buy Hold
JOBS 51job Inc. Upgrade Buy Hold
KNXA Kenexa Upgrade Hold Sell
PACW PacWest Bancorp Downgrade Sell Hold
PROV Provident Financial Holdings Downgrade Sell Hold
RIO Vale Upgrade Buy Hold
RIO.PR Vale Upgrade Buy Hold
SRVY Greenfield Online Downgrade Hold Buy
TG Tredegar Downgrade Hold Buy
VELC Velcro Industries Upgrade Buy Hold

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

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