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.
The following ratings changes were generated on September 5.
BioMed Realty Trust
was upgraded to buy from hold. BioMed Realty Trust operates as a real estate investment trust in the U.S. The company engages in the acquisition, development, ownership, leasing and management of laboratory and office space for the life science industry. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and solid stock price performance. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity.
Despite its growing revenue, the company underperformed as compared with the industry average of 10.0%. Since the same quarter one year prior, revenue has slightly increased by 3.8%. This growth in revenue doesn't appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
The debt-to-equity ratio is somewhat low, currently at 0.99, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels.
The gross profit margin for BMR is 38.90% which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 25.80% is above that of the industry average.
Looking at where the stock is today compared with one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the
over the same period, despite the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
BMR reported flat earnings per share in the most-recent quarter. The company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, BMR increased its bottom line by earning 84 cents compared with 58 cents in the prior year. For the next year, the market is expecting a contraction of 11.3% in earnings (75 cents vs. 84 cents).
BMR had been rated a hold since Sept. 1, 2006.
has been upgraded to buy from hold. Resources Connection, a professional services company, provides finance, accounting, risk management and internal audit, information management, human resources, supply chain management, actuarial and legal services professionals in support of client-led projects and initiatives. Our rating is based on the company's expanding revenue, higher returns, and healthy liquidity position, offset by declining margins and earnings, and lower operating cash flow and cash balances. The company has witnessed continued growth in the average bill rates; however, the company's performance might be adversely impacted, if the U.S. economy slowdown continues.
During the fourth quarter of fiscal year 2008, Resources Connection's revenue surged 18.1%, boosted by an increase in international revenue, a favorable exchange rate and an extra week during the quarter. Revenue was $236.72 million, which included $5.70 million from
acquired in December 2007. Revenue from the U.S. increased 10.4% and international revenue climbed 42.5%.
RECN's fiscal fourth-quarter 2008 earnings declined marginally by 1.0% hurt by rising costs and expenses, and thereby resulting in lower margins. Net income was $15.90 million compared with $16.06 million in the fourth quarter fiscal year 2007. However, earnings per share increased 9.4% to 35 cents from 32 cents in last year. Furthermore, gross profit margin declined marginally to 39.38% from 39.48% a year ago, while operating margin worsened 65 basis points to 12.04% from 12.69%.
For the quarter ended June 2008, cash balances were $106.81 million, while net operating cash flow decreased 34.4% to $30.27 million. However, the quick ratio was 2.55, reflecting healthy liquidity position. Meanwhile, both return on assets and equity improved 19 basis points to 11.98% and 101 basis points to 16.08%, respectively. Returns expanded because of a decline in equity and assets, which outpaced the earnings decrease.
Recently, Resources Connection announced the appointment of Donald B. Murray as executive cairman of the company. Thomas D. Christopoul was named president and CEO replacing Murray. RECN's operating margin deteriorated in the quarter under review mainly because of higher compensation expenses. Since the company operates in a highly competitive and fragmented market, it provides competitive compensation packages and other benefits to its associates in order to retain talent. Given the weak market scenario, such privileges have an adverse impact on its earnings. RECN's net income has decreased by 11.1% to $13.04 million in the recently-ended quarter.
RECN had been rated a hold since Aug. 11, 2006.
Jones Apparel Group
has been upgraded to hold from sell. Jones Apparel Group engages in the design, marketing and wholesale of apparel, footwear and accessories primarily in the U.S. and Canada. The company's strengths can be seen in multiple areas, such as its impressive record of earnings-per-share growth, compelling growth in net income and expanding profit margins. However, as a counter to these strengths, we believe that the company's cash flow from its operations has been weak overall.
JNY reported significant earnings-per-share improvement in the most-recent quarter compared with a year earlier. The company has demonstrated a pattern of positive earnings-per-share growth over the past year. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, JNY has turned itsbottom line around by earning 29 cents compared with a loss of $1.68 a share in the prior year. This year, the market expects an improvement in earnings ($1.25 vs. 29 cents).
The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the textiles, apparel & luxury goods industry. The net income increased by 122.7% when compared with the same quarter one year prior, rising to $10.70 million from a loss of $47.10 million.
Despite currently having a low debt-to-equity ratio of 0.39, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Despite the fact that JNY's debt-to-equity ratio is mixed in its results, the company's quick ratio of 1.97 is high and demonstrates strong liquidity.
Compared with where it was trading a year ago, JNY's share price hasn't changed very much because of the relatively weak year-over-year performance of the overall market, the company's stagnant earnings and other mixed results. We feel that the combination of its price rise over the last year and its current price-to-earnings ratio relative to its industry tend to reduce its upside potential.
Net operating cash flow has declined marginally to $163.20 million, or 8.57% when compared with the same quarter last year. Despite a decrease in cash flow of 8.57%, JNY is in line with the industry average cash flow growth rate of -10.36%.
JNY has been rated a buy since May 1, 2008.
H & R Block
has been downgraded to hold from buy. H&R Block provides tax, investment, retail banking, accounting and business consulting services and products. It operates in three segments: tax services, business services and consumer financial services. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, reasonable valuation levels and good cash flow from operations. However, as a counter to these strengths, we find that the company hasn't been very careful in the management of its balance sheet.
The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the diversified consumer services industry. The net income increased by 56.1% when compared with the same quarter one year prior, rising from a loss of $302.58 million to a loss of $132.72 million.
The company's current return on equity greatly increased when compared with return on equity from the same quarter one year prior. This is a signal of significant strength within the corporation. In comparison with other companies in the diversified consumer services industry and the overall market on the basis of return on equity, HRB has underperformed in comparison with the industry average but has greatly exceeded that of the S&P 500.
HRB, with its decline in revenue, underperformed when compared with the industry average of 0.7%. Since the same quarter one year prior, revenue fell by 10.9%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
The debt-to-equity ratio of 1.37 is relatively high when compared with the industry average, suggesting a need for better debt level management. To add to this, HRB has a quick ratio of 0.53. This demonstrates the lack of ability of the company to cover short-term liquidity needs.
HRB had been rated a buy since July 1, 2008.
has been downgraded to sell from hold. Chico's FAS, together with its subsidiaries, operates as a specialty retailer of casual-to-dressy clothing, intimates, complementary accessories and other non-clothing gift items. It offers its products under Chico's, White House Black Market and Soma Intimates brand names. Our rating is based on the company's declining revenue, lower earnings, weak liquidity position and shrinking returns. Declining comparable store sales, lower customer traffic and higher store operating expenses also hurt financial performance.
Chico's fiscal second-quarter 2008 revenue fell 7.1% to $405.22 million on account of a 15.9% decline in comparable-store sales, lower customer traffic and sluggish consumer spending. Chico's/Soma stores sales dropped 10.2% to $277.28 million on a 19.0% fall in same-store sales, an 8.0% decline in average transaction size and an 11.6% dip in average unit retail for its front-line stores. Net sales by the direct-to-consumer channel plunged 19.2% to $13.84 million.
During the second quarter of 2008, Chico's gross profit margin dipped 497 basis points to 53.34% from higher markdowns on the Chico's brand and a lower merchandise margin at WH|BM stores. CHS operating margin slipped 1,131 basis points to 1.94%. The company's net income plunged 82.7% to $6.68 million, or 4 cents a share, from $38.68 million, or 22 cents a share, as a result of higher merchandise markdowns and lower sales.
For the latest second quarter, the company's cash position worsened as cash and cash equivalents dropped 3.3% to $277.69 million. Return on assets shrank 1,076 basis points to 1.79%, while return on equity slipped 1,476 basis points to 2.42%. The drop in both returns was caused by lower earnings and a higher equity and asset base.
The company's continued investment in its product development and merchandising functions coupled with deleverage costs and new store additions may boost future revenue. In addition, impressive WH|BM stores sales, increased average unit retail price at its WH|BM stores and higher comparable-store sales at Soma stores could help future performance.
CHS had been rated a hold since July 27, 2007.
Additional ratings changes from Sept. 5 are listed below.
Advanced Energy Industries Inc.
Biomed Realty Trust Inc.
Chicos FAS Inc.
Hanger Orthopedic Group
Block H & R
Internet Initiative Japan
Jones Apparel Group
Resources Connection Inc.
Sanders Morris Harris Group
Synergetics USA, Inc.
This article was written by a staff member of TheStreet.com Ratings.