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TSC Ratings' Updates: Panhandle Oil & Gas

Net income increased by 41.9% since the year-ago quarter, rising from $300,000 to $430,000. Revenue fell by 7% but still outperformed the industry average, and EPS increased. GSE Systems has no debt to speak of, and it maintains a quick ratio of 2.5, demonstrating its ability to cover short-term cash needs. The gross profit margin of 28.3% is lower than desirable, having decreased from the same quarter the previous year, and the net profit margin of 6.1% significantly trails the industry average.

We've upgraded Panhandle Oil & Gas (PHX - Get Report), which engages in the acquisition, management and development of oil and gas properties, from hold to buy. This rating is driven by the company's robust revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and good cash flow from operations. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself.

Revenue leaped by 118.3% since the year-ago quarter, greatly outperforming the industry average of 14.2% growth. Net operating cash flow increased to $14.5 million, or by 37.2% compared with the year-ago quarter, and ROE also increased greatly. Panhandle's debt-to-equity ratio of 0.14 is very low and currently below the industry average, implying very successful management of debt levels. The company also maintains a quick ratio of 1.1, which illustrates its ability to avoid short-term cash problems. Its gross profit margin of 88.9% is very high, having increased since the year-ago quarter, and its 36.8% net profit margin significantly outperformed the industry average.

We've downgraded Ixia (XXIA - Get Report), which provides test systems for IP-based infrastructure and services, from hold to sell. This rating is driven by the company's deteriorating net income, disappointing return on equity, decline in the stock price during the past year and feeble growth in its earnings per share.

Net income decreased from $4.4 million in the year-ago quarter to -$18.3 million in the most recent quarter, significantly underperforming the S&P 500 and the communications equipment industry. ROE also decreased, a clear sign of weakness within the company, and EPS experienced a steep decline. 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. Ixia's gross profit margin of 75.2% is currently very high, though it has decreased significantly from the same period last year. Its net profit margin of -44.60% significantly underperformed when compared to the industry average.

Shares are down 12% year over year, in part reflecting the market's overall decline (which was actually deeper), but this should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.

All ratings changes generated on Feb. 9 are listed below.

BioForm Medical
Entropic Communications
GSE Systems
Panhandle Oil & Gas
Neutral Tandem

Each business day, 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.

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.
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