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 July 17.
, which provides software applications for contact centers and voice over Internet protocol (VoIP) applications to enterprises was downgraded to hold. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks.
The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, a generally disappointing performance in the stock itself and feeble growth in the company's earnings per share. In its recent quarterly release, revenue rose by 21.4%., which is higher than the industry average of 3.8% -- the growth in revenue does not appear to have trickled down to the company's bottom line. Net income has significantly decreased to $1.12 million from $1.75 million. When compared with the same quarter one year ago, it has decreased 36.3%. We notice the company has very high gross profit margins of 72.10% but the percentage has decreased from the same period last year.
Interactive's net profit margin also decreased significantly to 3.80% for the same period one year prior. Interactive Intelligence has no debt to speak of resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.46, which illustrates the ability to avoid short-term cash problems.
Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 65.71%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 33.33% 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. Interactive Intelligence had been rated a buy since October 26, 2006.
, which engages in the sale of oil and gas, andexploration and development of oil and gas reserves, was downgraded to sell. The downgrade is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive result.
The company's weaknesses can be seen in multiple areas, such as in its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity and weak operating cash flow. Magellan's earnings have gone downhill when comparing its most recently reported quarter with the same quarter a year earlier. The company has suffered a declining pattern earnings per share over the past two years. During the past fiscal year, the company earned 1 cent per share vs. 3 cents in the prior year.
In its recent quarterly report, the company's net income deteriorated significantly, falling to a loss of $9.68 million from a loss of $0.01 million when compared with the same quarter one year ago. 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.
There was also weakness in its cash flow from its operations -- net operating cash flow has decreased by 19.77% to $2.67 million when compared with the same quarter last year. Return on equity has greatly decreased when compared to its ROE 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 & Consumable Fuels industry and the overall market, Magellan Petroleum's return on equity significantly trails that of both the industry average and the S&P 500. This stock's share value has moved by only 19.77% over the past year.
Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it 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. Magellan had been rated a hold since June 16, 2008.
Saba Software AG
, which provides a software platform for enterprise learning, collaboration, performance and talent management, was downgraded to sell. The downgrade was the result specific weaknesses that can be seen in multiple areas, such as its weak operating cash flow and generally disappointing historical performance in the stock itself.
The return on equity has improved slightly when compared with the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Internet Software & Services industry and the overall market, Saba Software's return on equity significantly trails that of both the industry average and the S&P 500. Although the company's debt-to-equity ratio of 0.03 is very low, it is currently higher than that of the industry average. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.87 is somewhat weak and could be cause for future problems.
Net operating cash flow has declined marginally by 8.40% to $3.87 million when compared with the same quarter last year. After analyzing its recent quarterly report, we notice Saba Software's gross profit margin is rather high; currently at 65.80%. Gross Margins has increased from the same quarter the previous year but the company's net profit margin of 0.60% significantly trails the industry average. Saba Software's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 44.08%, which is also worse that the performance of the S&P 500 Index. 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. But as of now, we feel the stock is still not a good buy. Saba Software had been rated a hold since February 22, 2007.
, which engages in the production, distribution, marketing, and sale of cement, ready-mix concrete, aggregates and other construction materials, was downgraded to hold. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock.
The company's strengths can be seen in multiple areas, such as its increase in net income, robust revenue growth and attractive valuation levels; however, as a counter to these strengths, we also find weaknesses including generally poor debt management, poor profit margins and a generally disappointing performance in the stock itself. The debt-to-equity ratio of 1.11 is relatively high when compared with the industry average, suggesting a need for better debt level management. Along with this, the company manages to maintain a quick ratio of 0.47, which clearly demonstrates the inability to cover short-term cash needs.
In its most recent quarterly report, net income rose to $570.37 million from $428.41 million, an increase of 33.1% year over year; however, on the basis of net income growth from the same quarter one year ago, Cemex has significantly outperformed against the S&P 500 and exceeded that of the Construction Materials industry average. While revenue rose by 25.9% in the same time frame, it underperformed the industry average of 32.2%. Gross profit margin for Cemex is lower than what is desirable, coming in at 30.80% -- a decrease from the same quarter the previous year. Regardless of the weak results of the gross profit margin, net profit margin of 9.40% is above that of the industry average. Cemex had been rated a buy since March 22, 2007.
, which engages in the design, manufacture and distribution of specialty printing devices that print variable information on demand at the point of issuance, was initiated with a hold.
Even though the company's strengths can be seen in multiple areas, such as its growth in earnings per share, increase in net income and revenue growth; we also find weaknesses including a generally disappointing performance in the stock itself and premium valuation. Net income increased to $27.64 million from $26.72 million in the same quarter one year prior, an increase of 3.5%. The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Office Electronics industry average.
On an earnings per share basis, Zebra Technologies in the same quarter improved its EPS by 7.7% year over year. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, Zebra Technologies increased its bottom line by earning $1.60 a share compared with 98 cents the prior year. This year, the market expects the improvement in earnings to be $1.89 a share. The stock is off 24.13% from its price level of one year ago, reflecting the general market trend and ignoring their higher earnings per share compared with the year-earlier quarter. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. It was down over the last twelve months and it could be down again in the next twelve. Naturally, a bull or bear market could sway the movement of this stock. Zebra Technologies had been rated a buy since April 28, 2008.
Additional ratings changes from July 17 are listed below.
CEMEX SAB DE CV
ENTERPRISE BANCORP INC/MA
INTERACTIVE INTELLIGENCE INC
MAGELLAN PETROLEUM CORP
SABA SOFTWARE INC
ZEBRA TECHNOLOGIES CP
This article was written by a staff member of TheStreet.com Ratings.