TSC Ratings Upgrades and Downgrades

Illumina gets an upward nod, while Kinetic Concepts takes a tumble.
By Simone Baribeau ,

Each business day, TheStreet.com 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.

The following ratings changes were generated on April 24, 2008.

Illumina

(ILMN) - Get Report

, which develops tools for genetic research, has been upgraded from sell to hold. Since the same quarter one year prior, revenue leaped by 68.9%, compared with an industry average of 40.3%. And its 11% net profit margin is higher than the industry average. But net operating cash flow swung to negative $62.76 million from a positive $14.64 million in the same quarter last year. At 60.2%, the company's gross profit margin is high, but lower than last year's 68.8% margin.

Despite somewhat volatile earnings recently, Illumina reported significant earnings-per-share improvement in the most recent quarter, compared with the same quarter a year ago. We feel it is poised for EPS growth in the coming year. During the past fiscal year, Illumina swung to a loss, reporting -$5.25 vs. $0.80 in the prior year. This year, the market expects an improvement in earnings ($1.17 vs. -$5.25).

Illumina had been rated sell since March 21, 2007.

Kinetic Concepts

(KCI)

, a medical technology company, has been downgraded from buy to hold. Revenue growth was 13.9%, well exceeding the industry average of 3.5%; earnings per share has improved by 25.3%. We feel that this trend should continue. But return on equity decreased compared to the same quarter a year prior. Though return on equity significantly exceeds that of both the industry average and the

S&P 500

, we feel the decrease is a signal of major weakness within the corporation.

KCI's stock share price has done very poorly compared with where it was a year ago: Despite any rallies, the net result is that it is down by 29.16%, which is also worse that the performance of the S&P 500. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, 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.

Kinetic Concepts had been rated buy since Feb. 26, 2007.

Corus Entertainment

(CJR)

, a Canadian media and entertainment company, has been downgraded from buy to hold. At 2.3%, CJR's revenue growth has slightly outpaced the industry average of 1.8%. Growth in the company's revenue appears to have helped boost the earnings per share, which grew to $1.24 compared with $0.41 in the same period the prior year.

CJR's debt-to-equity ratio of 0.63 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.16 is sturdy. The company's current return on equity has slightly decreased from the same quarter one year prior, implying a minor weakness in the organization. Compared to other companies in the media industry and the overall market, on the basis of return on equity, CJR has outperformed the industry average. However, it has underperformed when compared to the S&P 500.

CJR has underperformed the S&P 500 Index, declining 17.01% from its price level of one year ago. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.

CJR had been rated buy since Jan. 12, 2007.

CEC Entertainment

(CEC)

, franchiser of "Chuck E. Cheese," has been upgraded from hold to buy. Despite revenue growth of 5.3% compared to the same quarter one year prior, the company underperformed as compared with the industry average of 13.9%. But the company's current return on equity greatly increased when compared with its ROE from the same quarter one year prior and exceeds the industry average.

Though the company has recently reported somewhat volatile earnings, CEC has improved earnings per share by 32.6% in the most recent quarter compared to the same quarter a year ago. We feel it is poised for EPS growth in the coming year. During the past fiscal year, CEC reported lower earnings of $1.69 vs. $2.03 in the prior year. This year, the market expects an improvement in earnings ($2.37 vs. $1.69).

Though it decreased slightly since last year, we consider CEC's growth profit margin of 46.60% to be strong. However, the net profit margin of 13.40% trails the industry average.

CEC had been rated hold since July 25, 2007.

Health Management Associates

(HMA)

, a parent company of non-urban general acute-care hospitals, was upgraded from sell to hold. At 6.2%, HMA's revenue growth has slightly outpaced the industry average of 5.1%. Since the same quarter one year prior, revenue slightly increased by 4.1%.

Net income significantly outpaced the industry average, increasing by 105.8% to $133.88 million when compared to the same quarter one year prior. But the debt-to-equity ratio is very high at 22.49 and currently higher than the industry average, implying that there is very poor management of debt levels within the company.

Regardless of the company's weak debt-to-equity ratio, HMA has managed to keep a strong quick ratio of 1.95, which demonstrates the ability to cover short-term cash needs.

At 15.8%, the gross profit margin for HMA is rather low and it decreased from the same quarter the previous year. Regardless of the weak results of the gross profit margin, the net profit margin of 11.60% is above that of the industry average.

HMA had been rated sell since March 21, 2007.

Additional ratings changes are listed below.

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