TSC Ratings' Upgrades, Downgrades: Alvarion

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 Thursday, June 26.

Alvarion ( ALVR), which provides WiMAX and non-WiMAX wireless broadband systems, was upgraded to hold. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weakness, 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 impressive record of earnings-per-share growth. Alvarion has no debt to speak of, therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. In its most recent quarter, revenue rose by 29% year over year, slightly outpacing the industry average of 21.5%. This growth in revenue appears to have trickled down to the company's bottom line, improving its earnings per share.

The gross profit margin for Alvarion is rather high -- currently at 50.8%. Regardless of company's high profit margin, it has managed to decrease from the same period last year. In addition, we also find weakness including a generally disappointing performance in the stock itself and weak operating cash flow. Net operating cash flow has declined marginally to $3.67 million, or 8.5% of revenue, when compared to the same quarter last year. The stock is off 16.7% from its price level of one year ago, reflecting the general market trend as investors ignore the company's higher earnings per share compared to the year-earlier quarter.

Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry. Alvarion had been rated a sell since May 6, 2008.

Digital River ( DRIV) -- which provides outsourced e-commerce solutions to various companies in the software and high-tech products, consumer electronics, computer and video games, and other markets -- was upgraded to buy with a target price of $47.75. This rating is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover.

The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels, expanding profit margins, largely solid financial position with reasonable debt levels by most measures and notable return on equity. We feel these strengths outweigh the fact that the company has had sub-par growth in net income.

The company currently has a low debt-to-equity ratio of 0.3; however, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Despite the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.46 is sturdy.

The company's revenue growth trails the industry average of 38.8%. Revenue in its recent quarterly report rose by 13.1% year over year. However, growth in revenue does not appear to have trickled down to the company's bottom line, since there was a decline in earnings per share. EPS declined by 6.5% in its quarter compared to its earnings the same quarter a year ago. This company has reported somewhat volatile profits recently. But, we feel it is poised for EPS growth in the coming year.

During the past fiscal year, Digital River increased its bottom line by earning $1.59 a share compared to $1.40 a share in the prior year. This year, the market expects an improvement in earnings to be $1.90 a share. The gross profit margin for Digital River is currently very high, coming in at 86.1%. Yet the company has displayed that such margins are perhaps unsustainable due to the decrease over the same period last year. On the positive side, the company's net profit margin of 17.6% trails the industry average. Digital River had been rated a hold since Dec. 19, 2007.

Clean Energy Fuels ( CLNE), which provides natural gas as an alternative fuel for vehicle fleets in the U.S. and Canada, was initiated with a hold rating. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, weak operating cash flow and poor profit margins.

In the company's recent quarterly report, revenue in comparison to the same quarter one year prior, increased by 6.3%. The revenue growth trails the industry average of 29.6%. The slight growth in revenue does not appear to have trickled down to the company's bottom line, since its earnings per share declined. The company does demonstrate the ability to cover short-term cash needs judging from the its quick ratio of 6.14. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, Clean Energy's return on equity significantly trails that of both the industry average and the S&P 500.

Net operating cash flow has significantly decreased to -$5.7 million. Net income has significantly decreased by 524% when compared to the same quarter one year ago, falling to a loss of $5.43 million from a loss of $870,000. The growth in net income for Clean Energy has significantly underperformed compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry.

ExlService Holdings ( EXLS), which provides business process outsourcing (BPO), research and analytics, and advisory services, was downgraded to sell. The new rating is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results.

Among the areas we feel are negative, one of the most important has been a generally disappointing historical performance in the stock itself. ExlService has underperformed the S&P 500, declining 18.1% year-over-year. 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 12 months; and it could be down again in the next 12 months. Naturally, a bull or bear market could sway the movement of this stock. The company, on the basis of net income growth from the same quarter one year ago, has significantly underperformed compared to the IT services industry average, but it is greater than that of the S&P 500.

Net income in its recent quarter rose to $6.80 million from $5.41 million the same quarter last year, an increase of 25.7%. Earnings per share also rose in the double digits for the recent quarterly, increasing by 21.1% year over year. The company has demonstrated a pattern of positive earnings-per-share growth over the past year. However, we anticipate underperformance relative to this pattern in the coming year.

We do consider ExlService's growth margin of 36.5% quite strong. In spite of the company's high profit margin, it has decreased from the same period last year. Regarding its net profit margin, it is currently at 13.3%, which trails the industry average. During the past fiscal year, the firm has increased its bottom line by earning 92 cents a share from 22 cents a share in the prior year. For the next year, the market is expecting earnings to decrease to 83 cents a share. ExlService had been rated a hold since March 14, 2008.

F.N.B. ( FNB) -- which provides various financial services to consumers and small to medium-sized businesses in Pennsylvania, Ohio, Florida and Tennessee -- was downgraded to hold. The primary strengths of the company are its ability of expanding profit margins over time. At the same time, however, we also find weaknesses including a generally disappointing performance in the stock itself, disappointing return on equity and weak operating cash flow.

F.N.B. operates with a rather high gross margin of 61%. This is an increase from the same quarter the previous year. Along with this, the net profit margin of 14.9% is above that of the industry average. Even though the company has high profitable margins, its revenue has declined slightly by 0.6% year over year in its recent quarter. Its revenue growth underperformed the industry average of 20%. The decline in revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.

Net operating cash flow also decreased to $18.44 million, or 31.9% of revenue, when compared to the same quarter last year. Despite a decrease in cash flow, F.N.B is still faring well by exceeding its industry average cash flow growth rate of -53%. Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, FNB has underperformed the S&P 500, declining 22% from its price level of one year ago.

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 12 months; and it could be down again in the next 12 months. Naturally, a bull or bear market could sway the movement of this stock. F.N.B. had been rated a buy since April 17, 2008.

Additional ratings changes from June 26 are listed below.

Ticker Company Name Change New Rating Former Rating
ALVR Alvarion Upgrade Hold Sell
CHIP VeriChip Initiated Sell
CLNE Clean Energy Fuels Initiated Hold
DRIV Digital River Upgrade Buy Hold
ECMV eCom Ventures Downgrade Sell Hold
EXLS ExlService Downgrade Sell Hold
FNB F.N.B. Downgrade Hold Buy
FSTF First State Financial Downgrade Sell Hold
PRSC Providence Service Downgrade Hold Buy
SLXCF Stellar Pharmaceuticals Downgrade Sell Hold
SPNG SpongeTech Delivery Systems Initiated Sell
TRTI Transtech Industries Downgrade Sell Hold
UNCA Unica Upgrade Hold Sell
VASC Vascular Solutions Upgrade Hold Sell
VYXC Vyrex Upgrade Hold Sell

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

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