TSC Ratings' Updates: MasterCard

We've downgraded Lennox International(LII Quote), which engages in the design, manufacture and marketing of a range of products for heating, ventilation, air conditioning and refrigeration markets, from buy to hold. Strengths include its growth in earnings per share, notable return on equity and good cash flow from operations. However, as a counter to these strengths, we find that the company's profit margins have been poor overall.

Lennox has improved earnings per share by 9.1% 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, which we feel should continue. During the past fiscal year, it increased its bottom line by earning $2.44 vs. $2.26 in the prior year, and this year, the market expects further improvement to $2.69. Current return on equity exceeded its ROE from the same quarter one year prior, a clear sign of strength within the company. On the basis of ROE, Lennox outperforms both the building products industry and the S&P 500.

The gross profit margin is currently lower than what is desirable, coming in at 30.20%, though it has managed to increase from the same period last year. Net operating cash flow has remained constant at $116.00 million, with no significant change when compared with the same quarter last year. Along with maintaining stable cash flow from operations, the firm exceeded the industry average cash flow growth rate of -39.51%.

Although LII's shares are off by a sharp 35.49% compared with one year ago, the decline was actually not as bad as the broader market plunge during that same time frame. One factor that may have helped cushion the fall somewhat was the year-over-year improvement in the company's EPS. In one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.