TSC Ratings' Updates: Genzyme

We've upgraded Genzyme(GENZ Quote) from hold to buy, driven by its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had subpar growth in net income.

Revenue rose by 20.8% since the same quarter a year ago, outpacing the industry average growth rate of 17.4%. Genzyme's debt-to-equity ratio is very low at 0.1 and is currently below the industry average, implying very successful management of debt levels. The company also maintains an adequate quick ratio of 1.4, which illustrates the ability to avoid short-term cash problems. Net operating cash flow has slightly increased to $254.2 million, or 5.5% when compared with the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -38.5%.

EPS declined by 27.6% in the most recent quarter compared with the same quarter a year ago. During the past fiscal year, Genzyme turned its bottom line around by earning $1.75 vs. -10 cents in the prior year. This year, the market expects an improvement in earnings to $3.99. Gebzyme's gross profit margin is currently very high at 78.7%, though it has decreased from the same period last year. Its net profit margin of 10.3%, however, is significantly lower.

We've downgraded Valhi(VHI Quote) from hold to sell, driven by its disappointing return on equity, poor profit margins, weak operating cash flow, generally disappointing historical performance in the stock itself and generally weak debt management.