TSC Ratings' Updates: Terra Industries

Terra Industries is upgraded; Provident Energy Trust is downgraded.
Author:
Publish date:

The following ratings changes were generated on Tuesday, March 17.

We've initiated coverage of specialty hardwood flooring retailer

Lumber Liquidators

(LL) - Get Report

at sell, driven by its feeble growth in its earnings per share.

Earnings per share improved significantly in the most recent quarter compared with the same quarter last year, but we anticipate underperformance in the coming year relative to its yearlong pattern of positive EPS growth. Lumber Liquidators' 35.2% gross profit margin is strong, having increased from the year-ago quarter. The net profit margin of 5.6% is above the industry average. Net operating cash flow improved to $11.8 million, compared with no net operating cash flow in the year-ago quarter.

Shares have risen over the past year, outperforming the

S&P 500

over the same period, but we feel that the risks involved in investing this stock do not compensate for any future upside potential.

We've initiated coverage on

MSCI

(MXB)

, which provides investment decision support tools, at sell, driven by premium valuation based on our review of its current price compared with such things as earnings and book value.

Net income fell 29.7% compared with the year-ago quarter, from $18.2 million to $12.8 million, greatly outperforming the diversified financial services industry average. The 1.5 debt-to-equity ratio is high but is still below the industry average, suggesting that this level of debt is acceptable within the industry. The 1.2 quick ratio is sturdy. The gross profit margin of 62.9% is rather high, though it decreased from the year-ago quarter.

Shares have falledn 45.5% over the year, in part reflecting the decline of the broader market. EPS declined 31.6%.

We've initiated coverage on retail drugstore operator

China Nepstar Chain Drugstore

(NPD)

at sell, driven by unimpressive growth in net income over time.

Net income decreased 19% compared with the same quarter last year, from $8.4 million to $6.8 million. Gross profit margin of 45.6% is strong, though it has decreased from the year-ago quarter. Net profit margin of 7% compares favorably with the industry average. ROE significantly underperforms the industry average and the S&P 500. EPS declined by 25% in the most recent quarter compared with the year-ago quarter, but we feel the company is poised for EPS growth in the coming year.

Shares are down 65.6% over the past year, underperforming the S&P 500.

We've downgraded open-end investment trust

Provident Energy Trust

(PVX)

from hold to sell, driven by its unimpressive growth in net income, poor profit margins and generally disappointing historical performance in the stock itself.

Net income fell from $68.6 million in the prior-year quarter to -$43.3 million in the most recent quarter, significantly underperforming the S&P 500 and the oil, gas and consumable fuels industry. Gross profit margin of 11.8% is extremely low, having decreased significantly from the prior-year quarter, and net profit margin of 7.3% is significantly below the industry average. Current ROE exceeds ROE from the same quarter last year, a clear sign of strength within the company. The 0.5 debt-to-equity ratio is low, though it is higher than the industry average. The 0.8 quick ratio is weak.

Shares are down 68.6% over the past year, underperforming the S&P 500, and EPS are down 38.9% 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 upgraded

Terra Industries

(TRA)

, which engages in the production and marketing of nitrogen and methanol products, from hold to buy. This rating is driven by the company's robust revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, attractive valuation levels and compelling growth in net income. We feel these strengths outweigh the fact that the company shows weak operating cash flow.

Revenue rose by 20.1% since the same quarter last year, outpacing the industry average of 9.9% growth. The 0.3 debt-to-equity ratio is low and below the industry average, implying successful management of debt levels, and the 2.4 quick ratio demonstrates the company's ability to cover short-term liquidity needs. ROE greatly increased compared with the year-ago quarter, a signal of significant strength. Net income increased 136.5%, from $69.7 million to $164.7 million.

Other ratings changes include

Sauer-Danfoss

(SHS)

, downgraded from hold to sell, and

Cypress Bioscience

(CYPB)

, upgraded from sell to hold.

All ratings changes generated on March 17 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.