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TSC Ratings' Upgrades, Downgrades: EV Energy

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 June 5.

Standard Motor Products (SMP), which makes, distributes and markets replacement parts for autos, has been upgraded to buy. For the first quarter, revenue increased 4.1% year over year to $208.1 million, and earnings per share climbed to 68 cents from 16 cents. For 2008, the market expects an improvement in full-year EPS to $1.07 from 29 cents. Return on equity has improved slightly year over year but trails the industry average. With a price-to-earnings ratio of 10.47, the stock trades at a discount to its sector peers. Standard Motor Products had been rated hold since June 1, 2007.

Wausau Paper (WPP), a paper company, has been upgraded to hold. Strengths such a solid financial position and good cash flow from operations are balanced by deteriorating net income, disappointing return on equity and poor profit margins. For the first quarter, revenue slipped 0.2% to $298.7, and earnings per share swung to a loss of 14 cents from a profit of 29 cents. The debt-to-equity ratio, 0.57, is low, implying successful management of debt levels. However, its quick ratio of 0.86 is weak. Return on equity has greatly decreased year over year and trails the industry average. The company's gross profit margin is currently extremely at 14%. It has decreased from the same quarter the previous year. Along with this, the negative net profit margin of 2.3% trails that of the industry average. Wausau Paper had been rated sell since Feb. 6.

EV Energy Partners (EVEP) -- which acquires, produces and develops oil and gas properties -- has been upgraded to hold. Strengths such as robust revenue growth, good cash flow from operations and expanding profit margins are weighed down by a disappointing stock-price performance, unimpressive growth in net income and feeble EPS improvement. For the fourth quarter, revenue quintupled year-over-year to $39.4 million, while earnings per share dropped to a 78-cent loss from a profit of 43 cents. Net operating cash flow has significantly increased to $16.6 million from the year-ago quarter. The company's debt-to-equity ratio of 0.95 is somewhat low overall, but it is high when compared to the industry average. Its quick ratio of 1.76 is high and demonstrates strong liquidity. Shares have fallen 20% in the past year. Despite the decline, the price-to-earnings ratio of 45.64 puts the stock at a premium to others in its industry. EV Energy Partners had been rated sell since Feb. 15.

American Safety Insurance (ASI), a specialty insurance and reinsurance company, has been downgraded to hold. Strengths such as revenue growth, an attractive valuation and notable return on equity are countered by poor profit margins, a disappointing stock-price performance and feeble growth in earnings per share. For the first quarter, revenue increased 1.1% year over year to $46.6 million, and earnings per share dropped to 55 cents from 65 cents. Return on equity has improved slightly year over year and exceeds the industry average. This can be construed as a modest strength in the organization. The gross profit margin is low at 15% and has decreased from the year-ago quarter. Regardless of the weak results of the gross profit margin, the net profit margin of 13% exceeds the industry average. Shares have fallen 28% in the past year, netting the stock a price-to-earnings ratio of 6.41, which makes it significantly cheaper than others in its industry. American Safety Insurance had been rated buy since Ratings initiated coverage on June 2, 2006.

American Vanguard (AVD) has been downgraded to hold. Strengths such as revenue growth, a reasonable valuation and expanding profit margins are countered by unimpressive growth in net income, weak operating cash flow and a decline in the stock price during the past year. For the first quarter, revenue was mostly unchanged at $40.9 million, and earnings per share slipped to 6 cents from 8 cents. For 2008, the market expects an improvement in full-year EPS to 78 cents from 69 cents in 2007. Net operating cash flow has significantly decreased to negative $30.1 million in the past year and its cash flow growth rate trails the industry average. With a price-to-earnings ratio of 19.91, the stock trades at a discount to others in its industry, but we still feel now is not a good time to buy. American Vanguard had been rated buy since May 13.

Additional ratings changes from June 5 are listed below.

Ticker Company Name Change New Rating Former Rating
ASI American Safety Insurance Downgrade Hold Buy
ATEC Alphatec Downgrade Sell Hold
AVD American Vanguard Downgrade Hold Buy
ESIC Easylink Services Upgrade Buy Hold
EVEP EV Energy Partners Upgrade Hold Sell
IBKR Interactive Brokers Group Initiated Sell
SMP Standard Motor Products Upgrade Buy Hold
VLEEY Valeo Upgrade Hold Sell
WPP Wausau Paper Upgrade Hold Sell

This article was written by a staff member of Ratings.

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