TSC Ratings' Updates: Netflix

Paid losses and loss adjustment expenses during the third quarter edged down 1.8% year over year to $483.14 million. Mercury raised its quarterly dividend by 11.5% to 58 cents per share, payable on Dec. 30, 2008. The company's loss ratio was 73.5% compared with 66.50%, and the expense ratio increased to 28.50% from 27.70% in the year-ago quarter. Consequently, the combined ratio for the quarter increased to 102% from 94.20%.

We've downgraded Netflix(NFLX Quote) from buy to hold. Strengths include its impressive record of earnings per share growth, compelling growth in net income and revenue growth. However, as a counter to these strengths, we find that the stock has had a decline in price during the past year.

Earnings per share improved by 43.5% in the most recent quarter compared with the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years, and we feel that this trend should continue, suggesting that the performance of the business is improving. During the past fiscal year, Netflix increased its bottom line by earning 97 cents vs. 71 cents in the prior year. This year, the market expects an improvement in earnings to $1.28. The net income growth of 30.2% from the same quarter one year ago has greatly exceeded that of the S&P 500 but is less than that of the internet and catalog retail industry average. Net operating cash flow has slightly increased to $73.23 million, or 3.75% when compared with the same quarter last year, but Netflix is still growing at a significantly lower rate than the industry average of 72.27%.