TSC Ratings' Updates: IBM

IBM is upgraded; Constellation Energy, Goodyear Tire & Rubber. Rockwood and Cimarex are downgraded
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The following ratings changes were generated on Thursday, Feb. 19.

We've downgraded energy products and services supplier

Constellation Energy

(CEG)

from hold to sell, driven by its deteriorating net income, generally weak debt management, disappointing return on equity, poor profit margins and generally disappointing historical performance in the stock itself.

Net income decreased from $261.4 million in the year-ago quarter to -$1,402.6 million in the most recent quarter, significantly underperforming the

S&P 500

and the independent power producers and energy traders industry. Return on equity also greatly decreased, a signal of major weakness within the corporation. The company's debt-to-equity ratio of 2.5 is very high and currently higher than the industry average, implying very poor management of debt levels. The 0.6 quick ratio demonstrates a lack of ability to cover short-term liquidity needs. Constellation's 6.9% gross profit margin is extremely low, having decreased from the year-ago quarter.

Shares have tumbled by77.1% over the past year, underperforming the S&P 500, and earnings per share are down 645.8% compared with the year-earlier 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.

We've downgraded

Goodyear Tire & Rubber

(GT) - Get Report

from hold to sell, driven by its deteriorating net income, generally weak debt management, disappointing return on equity, poor profit margins and generally disappointing historical performance in the stock itself.

Net income fell to -$330 million in the most recent quarter from $52 million in the year-ago quarter, significantly underperforming the S&P 500 and the auto components industry. ROE also greatly decreased, a signal of major weakness. Goodyear's very high debt-to-equity ratio of 4.9 is higher than the industry average, implying very poor management of debt levels, and its poor quick ratio of 0.9 illustrates its inability to avoid short-term cash problems. The 11.6% gross profit margin is extremely low, having decreased from the same period last year.

Shares have tumbled by 76.3% over the past year, underperforming the S&P 500, and EPS are down 607.4% compared with the year-earlier quarter. The fact that the stock has come down in price over the past year could be one of the factors that may help make the stock attractive down the road, but right now, we believe that it is too soon to buy.

We've upgraded

IBM

(IBM) - Get Report

from hold to buy, driven by its impressive record of earnings per share growth, increase in net income, notable return on equity, expanding profit margins and relatively strong performance when compared with the S&P 500 during the past year. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook.

EPS rose by 17.1% in the most recent quarter compared with the year-ago quarter, and we expect the company's two-year pattern of positive EPS growth to continue. Net income rose by 12% compared with the year-ago quarter, from $3.95 billion to $4.4 billion, greatly exceeding that of the S&P 500 but underperforming the computer and peripherals industry average. ROE also greatly increased, a signal of significant strength. Revenue fell by 6.4%. IBM's 47.2% gross profit margin is strong, though it has decreased from the year-ago quarter. The 16.4% net profit margin compares favorably with the industry average.

We've downgraded

Rockwood Holdings

(ROC)

, which engages in the development, manufacture, and marketing of specialty chemicals and advanced materials, from hold to sell. This rating is driven by the company's deteriorating net income, disappointing return on equity, poor profit margins, weak operating cash flow and generally weak debt management.

Net income decreased to -$690.8 million in the most recent quarter from $119.1 million in the year-ago quarter, significantly underperforming the S&P 500 and the chemicals industry. ROE also greatly decreased, a signal of major weakness. Net operating cash flow fell 34.4% to $51.4 million. Rockwood's 27.5% gross profit margin is currently lower than what is desirable, having decreased from the same quarter last year, and its net profit margin of -94.3% is significantly below the industry average. Its 3.4 debt-to-equity ratio is above the industry average, implying very poor management of debt levels within the company, but its quick ratio is somewhat strong at 1.4, demonstrating its ability to handle short-term liquidity needs.

We've downgraded independent oil and gas exploration and production company

Cimarex Energy

(XEC) - Get Report

from hold to sell, driven its deteriorating net income, disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

Net income fell to -$1,048.7 million in the most recent quarter from $130 million in the year-ago quarter, significantly underperforming the S&P 500 and the oil, gas and consumable fuels industry. ROE also greatly decreased, a signal of major weakness. Net operating cash flow has decreased to $226.82 million, or by 24.77%. EPS have declined steeply, by 935.1%, but consensus estimate suggests that Cimarex's two-year trend of declining EPS will reverse in the coming year.

Shares have tumbled by 51.2% over the past year, underperforming the S&P 500. Naturally, the overall market trend is bound to be a significant factor, and 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.

Other ratings changes included

RC2

(RCRC)

, and

Netsol Technologies

(NTWK) - Get Report

, both downgraded from hold to sell.

All ratings changes generated on Feb. 19 are listed below.

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.