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TSC Ratings' Upgrades, Downgrades: Repsol

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.

The following ratings changes were generated on June 10.

Basic Energy Services (BAS), which provides a wide range of well site services to oil and gas drilling and producing companies, has been upgraded to buy. For the first quarter, revenue rose 16% year over year to $229.9 million. Net operating cash flow has increased 48% to $56 million. In addition, Basic Energy Services has modestly surpassed the industry average cash flow growth rate of 40%. The company's debt-to-equity ratio of 0.79 is somewhat low overall, but it is high when compared with the industry average, implying that the management of the debt levels should be evaluated further. The quick ratio of 2.32, on the other hand, is high and demonstrates strong liquidity. Basic Energy Services had been rated hold since June 12, 2007.

Pall Corporation (PPL), a materials science and engineering company, offers proprietary products in the fields of filtration, separations and purification. Pall has been upgraded to buy. Since the same quarter one year prior, revenue rose 18%. The company's debt-to-equity ratio is somewhat low at 0.67, implying successful management of debt levels. Its quick ratio of 1.70 demonstrates an ability to cover short-term liquidity needs. The gross profit margin is rather high at 52%, and the net profit margin of 9.6% exceeds the industry average. Net operating cash flow has increased 41% to $91.4 million from the year-ago quarter. In addition, Pall has vastly surpassed the industry average cash flow growth rate of negative 36%. The stock had been rated hold since May 2008.

Repsol (REP), an oil and gas company based in Madrid, has been upgraded to buy. For the first quarter, revenue growth came in higher than the industry average of 30%. Since the same quarter one year prior, revenue rose 46%. Growth in revenue appears to have helped boost the earnings per share. Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company's strong earnings growth was key. This stock still has good upside potential despite the fact that it has already risen in the past year. The net income increased by 61% to $1.92 billion. The debt-to-equity ratio of 0.64 is somewhat low overall, but exceeds the industry average. Repsol had been rated hold since Dec. 10, 2007.

LAM Research (LRCX), which designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits, has been downgraded to hold. Strengths such as a solid financial position, reasonable valuation levels and expanding profit margins are countered by deteriorating net income, weak operating cash flow and a disappointing stock-price performance. Although the debt-to-equity ratio of 0.18 is very low, it is currently higher than that of the industry average. The quick ratio of 1.99 demonstrates an ability to cover short-term liquidity needs. At 49%, the gross profit margin is strong. The net profit margin of 17% compares favorably with the industry average. Net income has decreased 37% year over year to $103.5 million. Net operating cash flow has declined marginally to $146 million from the year-ago quarter. In addition, when comparing to the industry average, the firm's growth rate is much lower. LAM Research had been rated buy since TheStreet.com Ratings initiated coverage on June 9, 2006.

Hellenic Telecommunications (OTE), a provider of fixed-line voice telephony in Greece, has been downgraded to hold. For the first quarter, earnings per share improved 16% year over year to 22 cents. During the past fiscal year, Hellenic Telecom increased its bottom line by earning 99 cents a share vs. 78 cents in the prior year. This year, the market expects an improvement in EPS to $1.07. The company's revenue growth, at 20%, trails the industry average of 32%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share. Net operating cash flow has increased 19% to $509.7 million. The gross profit margin is currently lower than desirable at 35%. Along with this, the net profit margin of 9.20% trails the industry average. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time. Hellenic Telecom had been rated buy since Aug. 23, 2007.

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.

Additional ratings changes are listed below.

Ticker Company Name Change New Rating Former Rating
ABV.C CIA de Bebidas das Americas Downgrade Hold Buy
BAS Basic Energy Services Upgrade Buy Hold
BNE Bowne & Co. Upgrade Buy Hold
CASTU Chinacast Education Downgrade Sell Hold
CVO Cenveo Downgrade Sell Hold
DIN DineEquity Upgrade Hold Sell
FIGI Fortress International Initiated Sell
FRX Forest Laboratories Downgrade Hold Buy
GSIT GSI Technology Initiated Hold
HTGC Hercules Tech Growth Upgrade Hold Sell
IHR Interstate Hotels & Resorts Downgrade Sell Hold
JEN Jennifer Convertibles Downgrade Sell Hold
LHCG LHC Group Upgrade Buy Hold
LOOP Loopnet Upgrade Hold Sell
LRCX LAM Research Downgrade Hold Buy
NCMI National Cinemedia Initiated Sell
OTE Hellenic Telecom Downgrade Hold Buy
PCE Pacific Office Properties Downgrade Sell Hold
PLL Pall Corp. Upgrade Buy Hold
REP Repsol Upgrade Buy Hold
SAM Boston Beer Downgrade Hold Buy
TOMO Tomotherapy Initiated Sell
WMCO Williams Controls Downgrade Hold Buy
WRES Warren Resources Upgrade Buy Hold

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

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