TSC Ratings' Updates: Massey Energy

Compuware and Massey Energy are upgraded; Lam Research, Nalco and Northwest Bancorp are downgraded.
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The following ratings changes were generated on Wednesday, Feb. 4.

We've upgraded

Compuware

(CPWR)

, which provides software products, professional services and application services to IT organizations and IT service providers worldwide, from hold to buy. This rating is driven by the company's growth in earnings per share, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow.

Earnings per share have improved by 7.7% in the most recent quarter compared with the year-ago quarter, and we feel that the company's two-year pattern of EPS growth should continue. Return on equity also improved slightly compared with the year-ago quarter, outperforming the

S&P 500

but underperforming the software industry.

Compuware has no debt to speak of, and the company maintains an adequate quick ratio of 1.25, which illustrates its ability to avoid short-term cash problems. The 66.8% gross profit margin is rather high, having increased from the same quarter the previous year, but the 13% net profit margin trails the industry average.

We've downgraded

Lam Research

(LRCX) - Get Report

, which engages in the design, manufacture, marketing, and service of semiconductor processing equipment used in the fabrication of integrated circuits, from hold to sell. This rating is driven by the company's feeble growth in its earnings per share, deteriorating net income, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself.

Lam Research has experienced a 120.9% decline in EPS in the most recent quarter compared with the year-ago quarter. We anticipate that the company's yearlong pattern of declining EPS should continue in the next year. Net income decreased by 121% since the year-ago quarter, underperforming the S&P 500 and the semiconductor industry. ROE also greatly decreased, a signal of major weakness within the corporation. Net operating cash flow is down 281.9%.

Shares tumbled 51.3% 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.

We've upgraded

Massey Energy

(MEE)

, which produces, processes, and sells bituminous coal, sell to hold. Strengths include its robust revenue growth, increase in net income and growth in earnings per share. However, we also find weaknesses including a generally disappointing performance in the stock itself, disappointing return on equity and generally poor debt management.

Revenue rose by 30.6% since the same quarter last year, outperforming the industry average of 15.6% growth. Net income increased by 941.8%, from $5.2 million to $53.6 million. ROE, however, has decreased, a clear sign of weakness. Massey reported significant EPW growth in the most recent quarter compared with the year-ago quarter. Though the company has reported somewhat volatile earnings recently, we feel it is poised for EPS growth in the coming year.

Shares are down 60.8% on the year, underperforming the S&P 500, but do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, MEE is still more expensive than most of the other companies in its industry

We've downgraded

Nalco Holding

(NLC)

, which provides water treatment and process improvement products and services to industrial and institutional customers worldwide, from hold to sell. This rating is driven by the company's deteriorating net income, disappointing return on equity, weak operating cash flow, generally weak debt management and generally disappointing historical performance in the stock itself.

Net income decreased by 1,622% compared with the year-ago quarter, falling from $31.1 million to -$473.4 million. ROE also greatly decreased, underperforming both the industry average and the S&P 500. Net operating cash flow decreased by 36.1% to $81.8 million. Nalco's debt-to-equity ratio is very high at 8.2, currently higher than the industry average, implying very poor management of debt levels within the company. Its quick ratio, however, is somewhat strong at 1.1, demonstrating its ability to handle short-term liquidity needs.

Shares tumbled by 55% over the year, underperforming the S&P 500, and EPS fell 1,668.2% compared with the year-earlier quarter. 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.

We've downgraded

Northwest Bancorp

(NWSB)

, which operates as the holding company for Northwest Savings Bank, from buy to hold. Strengths include its expanding profit margins over time, but we also find weaknesses including deteriorating net income, disappointing return on equity and a decline in the stock price during the past year.

Northwest's gross profit margin of 55% is rather high, having increased from the same quarter last year. Net income decreased by 29% compared with the year-ago quarter, underperforming the thrifts and mortgage finance industry but outperforming the S&P 500. Revenue dropped by 8.2%, and EPS declined by 30.3%. The company has reported a trend of declining earnings per share over the past year, but the consensus estimate suggests that this trend should reverse in the coming year.

Shares are down 34.8% on the year, though the broader market's performance is worse. 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 include

Vignette

(VIGN)

, downgraded from hold to sell, and

NIC

(EGOV) - Get Report

, upgraded from hold to buy.

All ratings changes generated on Feb. 4 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.