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TSC Ratings' Updates: Procter & Gamble

The following ratings changes were generated on Friday, March 6.



We've downgraded natural gas company El Paso (EP) from hold to sell, driven by its deteriorating net income, generally weak debt management, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself.

Net income decreased to -$1.7 billion from $160 million in the same quarter last year, significantly underperforming the S&P 500 and the oil, gas and consumable fuels industry. El Paso's debt-to-equity ratio of 3.5 is very high and currently above the industry average, implying very poor management of debt levels within the company. Its 0.6 quick ratio demonstrates the company's lack of ability to cover short-term liquidity needs. Return on equity has greatly decreased compared with the year-ago quarter, a signal of major weakness. Net operating cash flow decline marginally, by 7% to $319 million.

Shares have tumbled 65.7% over the year, underperforming the S&P 500, and EPS are down 1,257.1%. The stock's decline 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.

We've downgraded Heinz (HNZ) 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 has not been very careful in the management of its balance sheet.

EPS improved by 11.8% in the most recent quarter compared with the year-ago quarter, and we feel that the company's two-year trend of positive EPS growth should continue, suggesting improving business performance. ROE increased from the year-ago quarter, a signal of significant strength. Net operating cash flow increased by 14.9% to $292.4 million, though at a significantly lower rate than the 116.8% industry average. Heinz's debt-to-equity ratio of 4.3 is very high and currently above the industry average, suggesting very poor management of debt levels, and its 0.6 quick ratio demonstrates its lack of ability to cover short-term liquidity needs.

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