TSC Ratings' Updates: Capital One

The following ratings changes were generated on Friday, Jan. 23.

We've upgraded AeroVironment(AVA Quote), which designs, develops and produces unmanned aircraft systems and efficient energy systems, from hold to buy, driven by its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, good cash flow from operations and growth in earnings per share. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value.

Revenue rose by 22.5% since the same quarter last year, and earnings per share rose significantly. The company has demonstrated a pattern of positive EPS growth over the past year, and we feel that this trend should continue. Net income increased by 75.4% compared with the same quarter last year, rising from $5.2 million to $9.1 million. AeroVironment has no debt to speak of and maintains a quick ratio of 6.6, which clearly demonstrates the ability to cover short-term cash needs. Its 39.7% gross profit margin is strong, having increased from the year-ago quarter, and its 13.8% net profit margin is above the industry average.

We've downgraded Capital One Financial(COF Quote) from hold to sell, driven by its generally disappointing historical performance in the stock itself, deteriorating net income, disappointing return on equity and feeble growth in its earnings per share.

Net income decreased by 727.4% compared with the year-ago quarter, and return on equity also greatly decreased. Revenue fell by 17.8%, and EPS declined by 531.8%. The company has reported a trend of declining earnings per share over the past two years, but the consensus estimate suggests that this trend should reverse in the coming year. Shares are down 44.9% on the year, underperforming the S&P 500, but the stock is still more expensive (when compared to its current earnings) than most other companies in its industry.