TSC Ratings' Upgrades, Downgrades: Merck, Volcom - TheStreet

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 May 23.

Salesforce.com

(CRM) - Get Report

, a provider of on-demand customer relationship management services, has been upgraded to buy. For the first quarter, revenue grew 53% year over year to $247.6 million, and earnings per share climbed to 8 cents from 0 cents.

For 2008, the market expects an improvement in full-year EPS to 35 cents from 15 cents in 2007. Salesforce.com has no debt to speak of, resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Its quick ratio of 1.10 illustrates an ability to avoid short-term cash problems. Net operating cash flow has more than doubled to $83.8 million when compared to the same quarter last year. In addition, the company has also vastly surpassed the industry average cash flow growth rate. Salesforce.com had been rated hold since TheStreet.com Ratings initiated coverage on May 22, 2006.

Merck

(MRK) - Get Report

, a pharmaceutical company, has been upgraded to buy. For the first quarter, revenue increased 0.9% year over year to $5.82 billion, and earnings per share rose to $1.52 from 78 cents. Net income increased 94% to $3.3 billion. The company's debt-to-equity ratio is very low at 0.22, implying successful management of debt levels. Its quick ratio of 1.32 demonstrates strong liquidity. Merck's gross profit margin is very high at 86%. The net profit margin of 57% significantly outperformed against the industry average. Merck had been rated hold since April 7.

Volcom

( VLCM), a designer of youth apparel, has been upgraded to hold. Strengths such as robust revenue growth, a solid financial position and an attractive valuation are countered by weak operating cash flow, a disappointing stock-price performance and disappointing return on equity. For the first quarter, revenue grew 59% year over year to $80.6 million, and earnings per share grew to 38 cents from 22 cents. Volcom's debt-to-equity of zero implies successful management of debt levels. Its quick ratio of 4.78 demonstrates an ability to cover short-term cash needs. Net operating cash flow has decreased 40% year over year to $5.63 million. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower. With a price-to-earnings ratio of 16.21, the stock trades at a discount to others in its industry. Volcom had been rated sell since Nov. 20.

H&R Block

(HRB) - Get Report

, a financial services company, has been upgraded to hold. Strengths such as revenue growth, notable return on equity and increase in net income are balanced by generally poor debt management, poor profit margins and weak operating cash flow. For the third quarter, revenue climbed 4.4% year over year to $972.6 million, and earnings per share declined to 3 cents from 7 cents. For this year, the market expects an improvement in full-year EPS to $1.30 from $1.14 a year ago. Return on equity greatly increased from the year-ago quarter to 76%, which exceeds the industry average. At 31%, the gross profit margin is lower than what is desirable. The negative net profit margin of 4.9% trails that of the industry average. H&R Block had been rated sell since Aug. 31.

Dillard's

(DDS) - Get Report

, an operator of department stores, has been downgraded to sell. For the first quarter, revenue declined 4.8% year over year to $1.71 billion, and earnings per share declined to 4 cents from 53 cents. For 2008, the market is expecting the company to swing to a 3-cent loss from a 2007 profit of 70 cents a share. Return on equity has declined year over year to 0.5% and trails the industry average. Gross profit margin, at 35%, is lower than desirable. The net profit margin of 0.2% trails the industry average. Shares have fallen 59% in the past year, netting the stock a price-to-earnings ratio of 77.90, which places it at a substantial premium to others in its sector.

Additional ratings changes from May 23 are listed below.

Ticker

Company Name

Change

New Rating

Former Rating

ADEP

Adept Technology

Downgrade

Sell

Hold

CRM

Salesforce.com

Upgrade

Buy

Hold

CSCX

Cardiac Science

Upgrade

Buy

Hold

DDS

Dillards

Downgrade

Sell

Hold

FCF

First Commonwealth Financial

Downgrade

Hold

Buy

HRB

H&R Block

Upgrade

Hold

Sell

KHD

KHD Humbolt Wedag

Downgrade

Hold

Buy

MRK

Merck

Upgrade

Buy

Hold

SAFM

Sanderson Farms

Upgrade

Buy

Hold

SUG

Southern Union

Upgrade

Buy

Hold

TEG

Integrys Energy

Upgrade

Buy

Hold

UDRL

Union Drilling

Upgrade

Buy

Hold

VLCM

Volcom

Upgrade

Hold

Sell

VVTV

Valuevision Media

Downgrade

Sell

Hold

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