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TSC Ratings' Upgrades, Downgrades: Delta

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 Wednesday, May 28.

Affiliated Computer Services (ACS), which provides business process outsourcing and information technology services, has been upgraded to buy. For the third quarter of fiscal 2008, revenue improved 7.3% year over year to $1.54 billion, and earnings per share rose to 85 cents from 82 cents.

This year, the market expects an improvement full-year EPS to $3.51 from $2.50. Net operating cash flow has more than doubled to $229.5 million from the year-ago quarter. In addition, Affiliated Computer Services has also vastly surpassed the industry average cash flow growth rate. The debt-to-equity ratio is 1.12 but is still below the industry average. The company's quick ratio of 1.64 is high and demonstrates strong liquidity. Affiliated Computer Services had been rated hold since May 25, 2007.

Alliance Data Systems (ADS - Get Report), which provides transaction, marketing and credit services, has been upgraded to buy. For the first quarter, revenue declined 9.1% year over year to $499.3 million, while earnings per share rose to 78 cents from 70 cents.

For 2008, the market expects an improvement in full-year EPS to $4.30 from $2.03 in 2007. Return on equity has slightly decreased from the same quarter one year prior and trails the industry average. This implies a minor weakness in the organization. Gross profit margin is rather low at 24%, and the net profit margin of 9.90% trails the industry average. Alliance Data Systems had been rated hold since May 25, 2007.

Choicepoint (CPS), a provider of identification and credential verification services, has been upgraded to buy. For the first quarter, revenue grew 4.9% year over year to $256.5 million, and earnings per share improved by a penny to 39 cents.

For 2008, the market expects an improvement in full-year EPS to $1.80 from 77 cents in 2007. Net operating cash flow has increased 30% to $51.29 million. Return on equity has improved to 16% from the year-ago quarter but trails the industry average. Shares have risen faster than the S&P 500 in the past year, netting the stock a price-to-earnings ratio of 62.22. At this valuation, the stock trades at a substantial premium to its peers. Choicepoint had been rated hold since Feb. 27.

Sallie Mae (SLM), a provider of education finance, has been downgraded to sell. For the first quarter, revenue declined 21% year over year to $2.24 billion, and earnings per share swung to a loss of 28 cents from a profit of 26 cents. For 2008, the market expects an improvement in full-year EPS to a profit of $1.57 from a loss of $3.54.

The debt-to-equity ratio is very high at 28.91 and is currently higher than the industry average, implying very poor management of debt levels within the company. Return on equity has fallen greatly from the year-ago quarter. This is a signal of major weakness within the corporation. Shares have fallen 58% in the past year. Although this price decline could make the stock more attractive down the road, we feel that it is too soon to buy right now.

Delta Air Lines (DAL - Get Report), an air carrier, has been initiated with a sell rating. For the first quarter, revenue increased 12% year over year to $4.77 billion, while net loss per share widened to $16.15 from 66 cents. The debt-to-equity ratio is very high at 2.31 and exceeds the industry average, implying very poor management of debt levels.

The quick ratio of 0.62 demonstrates an inability to cover short-term liquidity needs. The gross profit margin is currently extremely low at 11%. Net operating cash flow has decreased 21% from the year-ago quarter to $283 million. For 2008, the market is expecting a contraction in full-year EPS to a loss of $1.10 from a profit of $3.76 in 2007.

Additional ratings changes from May 28 are listed below.

Ticker Company Name Change New Rating Former Rating
ACS Affiliated Computer Services Upgrade Buy Hold
ADS Alliance Data Systems Upgrade Buy Hold
AHPI Allied Health Care Products Upgrade Buy Hold
BONT Bon-Ton Stores Downgrade Sell Hold
CBR Ciber Upgrade Buy Hold
CNK Cinemark Holdings Initiated Sell
CPBY China Information Security Technology Initiated Hold
CPS Choicepoint Upgrade Buy Hold
DAL Delta Air Lines Initiated Sell
END Endeavour International Upgrade Hold Sell
HMN Horace Mann Educators Downgrade Hold Buy
HPC Hercules Upgrade Buy Hold
ITI Iteris Upgrade Buy Hold
MMPI Meruelo Maddux Properties Initiated Sell
PNS Pinnacle Data Systems Upgrade Hold Sell
QSFT Quest Software Upgrade Buy Hold
SEE Sealed Air Downgrade Hold Buy
SLM Sallie Mae Downgrade Sell Hold
SPR Spirit Aerosystems Holdings Upgrade Hold Sell
STFC State Auto Financial Downgrade Hold Buy
TLP Transmontaigne Partners Upgrade Buy Hold

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

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SYM TRADE IT LAST %CHG
ADS $294.67 0.00%
CPS $61.79 0.00%
DAL $44.76 0.00%
ITI $1.81 0.00%
SLM $9.49 0.00%

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