TSC Ratings' Updates: Callaway Golf - TheStreet

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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 Thursday, Sept. 4.

Callaway Golf

(ELY) - Get Report

has been upgraded from hold to buy. Callaway Golf, together with its subsidiaries, designs, manufactures and sells golf clubs and golf balls in the U.S. and internationally. Its products include drivers, fairway woods, hybrids, irons, wedges, putters and golf balls.

The company's strengths can be seen in multiple areas, such as its growth in earnings per share, increase in net income, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow.

Callaway has improved earnings per share by 9.4% in the most recent quarter compared with the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ELY increased its bottom line by earning 78 cents vs. 33 cents in the prior year. This year, the market expects an improvement in earnings ($1.08 vs. 78 cents).

The net income growth from the same quarter one year ago has significantly exceeded that of the

S&P 500

and the leisure equipment and products industry. The net income increased by 1.3% when compared with the same quarter one year prior, going from $36.64 million to $37.11 million.

ELY's debt-to-equity ratio is very low at 0.22 and is currently below the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.01, which illustrates the ability to avoid short-term cash problems.

The gross profit margin for ELY is rather high; currently it is at 50.90%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 10.10% is above the industry average.

ELY had been rated a hold since June 18, 2008.

Eldorado Gold

(EGO) - Get Report

has been downgraded from buy to hold. Eldorado Gold engages in the acquisition, exploration, development and production of gold and other minerals. 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 and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and premium valuation.

The revenue growth significantly trails the industry average of 40.8%. Since the same quarter one year prior, revenue has slightly increased by 6.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.

EGO's debt-to-equity ratio is very low at 0.12 and is currently below the industry average, implying that there has been very successful management of debt levels.

Compared with its closing price of one year ago, EGO's share price has jumped by 42.85%, exceeding the performance of the broader market during that same time frame. Setting our sights on the months ahead, however, we feel that the stock's sharp appreciation over the last year has driven it to a price level which is now relatively expensive compared to the rest of its industry. The implication is that it has reduced upside potential is not good enough to warrant further investment at this time.

The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared with other companies in the metals and mining industry and the overall market, EGO's return on equity is below both the industry average and that of the S&P 500.

EGO had been rated a buy since May 7, 2008.

King Pharmaceuticals

( KG) has been downgraded from buy to hold. King Pharmaceuticals provides branded prescription pharmaceutical products worldwide. It primarily offers branded prescription products for primary care physicians, neurologists, orthopedic surgeons, hospitals, internal medicine physicians, allergists, pediatricians and pain specialists.

The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and disappointing return on equity.

KG's debt-to-equity ratio is very low at 0.15 and is currently below the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 3.78, which clearly demonstrates the ability to cover short-term cash needs.

The gross profit margin for KG is currently very high, coming in at 74.90%. Regardless of KG's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 10.80% trails the industry average.

The revenue fell significantly faster than the industry average of 14.4%. Since the same quarter one year prior, revenue fell by 26.9%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.

Net operating cash flow has declined marginally to $138.00 million or 4.59% when compared with the same quarter last year. In conjunction, when comparing current results with the industry average, KG has marginally lower results.

KG's current return on equity is lower than its return on equity from the same quarter one year prior. This is a clear sign of weakness within the company. In comparison with the other companies in the pharmaceuticals industry and the overall market, KG's return on equity is significantly below the industry average and is below that of the S&P 500.

KG has been rated a buy since Aug. 4, 2008.

Golar LNG Limited

(GLNG) - Get Report

has been downgraded from hold to sell. Golar LNG Limited, through its subsidiaries, operates as a liquefied natural gas (LNG) shipping company in Bermuda. It engages in the acquisition, ownership, operation, and chartering of LNG carriers. As of April 30, 2008, the company operated a fleet of 13 LNG carriers.

The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, generally weak debt management, disappointing return on equity, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared with the S&P 500 and the oil, gas and consumable fuels industry. The net income has significantly decreased by 86.9% when compared with the same quarter one year ago, falling from $89.47 million to $11.70 million.

The debt-to-equity ratio is very high at 3.59 and currently higher than the industry average, implying that there is very poor management of debt levels within the company. Along with this, the company manages to maintain a quick ratio of 0.48, which clearly demonstrates an inability to cover short-term cash needs.

Return on equity has greatly decreased when compared with its return on equity from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared with other companies in the oil, gas and consumable fuels industry and the overall market, LNG's return on equity significantly trails that of both the industry average and the S&P 500.

The share price of LNG is down 16.53% when compared with where it was trading one year earlier. This reflects both the trend in the overall market as well as the sharp decline in the company's earnings per share. 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.

LNG has experienced a steep decline in earnings per share in the most-recent quarter incomparison with its performance from the same quarter a year ago. This 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, LNG has increased its bottom line by earning $2.09 vs. $1.05 in the prior year. For the next year, the market is expecting a contraction of 91.9% in earnings (17 cents vs. $2.09).

LNG had been rated a hold since June 19, 2007.

Concho Resources

(CXO) - Get Report

has been initiated at hold. Concho Resources engages in the acquisition, development, exploitation and exploration of oil and natural gas properties. The company's strengths can be seen in multiple areas, such as its solid stock price performance, robust revenue growth and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income and generally poor debt management.

Compared with its closing price of one year ago, CXO's share price has jumped by 131.99%, exceeding the performance of the broader market during that same time frame.

CXO's very impressive revenue growth greatly exceeded the industry average of 29.9%. Since the same quarter one year prior, revenue leaped by 107.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.

In comparison with the other companies in the oil, gas and consumable fuels industry and the overall market, CXO's return on equity is significantly below that of the industry average and is below that of the S&P 500.

Despite currently having a low debt-to-equity ratio of 0.40, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 0.47 is very low and demonstrates very weak liquidity.

The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared with that of the S&P 500 and the oil, gas & consumable fuels industry. The net income has significantly decreased by 343.4% when compared with the same quarter one year ago, falling from $5.93 million to -$14.42 million.

Additional ratings changes from Sept 4 are listed below.

Ticker

Company Name

Change

New Rating

Former Rating

ARSD

Arabian American Development

Downgrade

Hold

Buy

CXO

Concho Resources Inc.

Initiated

Hold

EGO

Eldorado Gold Corp.

Downgrade

Hold

Buy

ELY

Callaway Golf Co.

Upgrade

Buy

Hold

GLNG

Golar LNG Limited

Downgrade

Sell

Hold

HPOL

Harris Interactive Inc.

Downgrade

Sell

Hold

KFY

Korn/Ferry International

Upgrade

Buy

Hold

KG

King Pharmaceuticals Inc.

Downgrade

Hold

Buy

PLFE

Presidential Life Corp.

Downgrade

Hold

Buy

PRGX

PRG-Schultz International Inc.

Upgrade

Hold

Sell

SUR

CNA Surety Corp.

Upgrade

Buy

Hold

This article was written by a staff member of TheStreet.com Ratings.