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 24. Tyco ( TYC), which provides various products ranging from electronic security and alarm monitoring to fire-fighting equipment and breathing apparatus, and from water purification and flow control solutions to galvanized steel tubes, and armored wire and cable to various customers worldwide, was downgraded to sell. The downgrade 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 compared with most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, weak operating cash flow and decline in the stock price during the past year.
Return on equity has greatly decreased when compared with its ROE from the same quarter one year prior. This is a sign of major weakness within the corporation. Compared with other companies in the industrial conglomerates industry and the overall market, Tyco's return on equity significantly trails that of both the industry average and the S&P 500. Its weakness in its cash flow is apparent, compared with the same quarter last year, its net operating cash flow has significantly decreased to -$2.440 billion, a decrease of about 254%. Net income has fallen significantly to $280 million from $835 million when compared with the same quarter one year ago -- a decrease of about 66%. This company has reported somewhat volatile earnings recently but we believe it is poised for EPS growth in the coming year. During the past fiscal year, Tyco swung to a loss, reporting a loss of $5.14 a share compared with a gain of $1.60 a share in the prior year. This year, the market expects an improvement in earnings of $2.77 a share. Tyco's stock is off 15.26% 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. 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. Tyco had been rated a hold since April 8, 2008.
Southwest Airlines ( LUV), which operates as a passenger airline that provides scheduled air transportation, was upgraded to buy. This change is driven by a number of 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, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures, notable return on equity and relatively strong performance when compared with the S&P 500 during the past year. We believe these strengths outweigh the fact that the company shows low profit margins. Southwest's revenue growth has slightly outpaced the industry average of 8.6%. Since the same quarter one year prior, revenue rose by 15.1%. However, the growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share. Net income has significantly decreased by 63.4% when compared with the same quarter one year ago, falling to $34 million from $93 million. Net operating cash flow has significantly increased by 56.23% to $964 million when compared with the same quarter last year. In addition, the company has also vastly surpassed the industry average cash flow growth rate of -5.05%. After analyzing the firm's financial positioning, we noticed its debt-to-equity ratio is very low at 0.29 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Despite the fact that Southwest's debt-to-equity ratio is low, the quick ratio, which is currently 0.60, displays a potential problem in covering short-term cash needs. 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 with other companies in the airlines industry and the overall market on the basis of return on equity, the company has outperformed in comparison with the industry average but has underperformed when compared with that of the S&P 500. Southwest Airlines had been rated a hold since Nov. 9, 2007.
CPI International AG ( CPII), which through its subsidiaries, provides microwave and radio frequency, power and control products, was upgraded to hold. The primary factors resulting in the upgrade 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 increase in net income, revenue growth and attractive valuation levels. However, as a counter to these strengths, we also find weaknesses including poor profit margins, a generally disappointing performance in the stock itself and generally poor debt management. The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Electronic Equipment & Instruments industry. The net income increased by 6.8% when compared with the same quarter one year prior, going from $5.76 million to $6.15 million. Conversely, the company's revenue growth trails the industry average of 29.0% -- in its most-recent quarter it grew slightly by 7.2% year over year. Despite the tepid growth compared to its peers, the growth in revenue does appear to have trickled down to the company's bottom line, improving its earnings per share. CPI International has improved earnings per share by 9.4% in the most-recent quarter compared with the same quarter a year ago. The company has demonstrated a pattern of positive EPS growth over the past year.
In the coming year, we anticipate underperformance relative to this pattern. During the past fiscal year, the company increased its bottom line by earning $1.27 a share from 78 cents a share in the prior year. For the next year, Wall Street is expecting it to fall to $1.15 a share. Currently the debt-to-equity ratio of 1.78 is quite high overall and when compared with the industry average, suggesting that the current management of debt levels should be re-evaluated. Even though the debt-to-equity ratio is weak, the firm's quick ratio is somewhat strong at 1.02, demonstrating the ability to handle short-term liquidity needs. The gross profit margin for CPI International is currently lower than what is desirable, coming in at 31.70%. It has decreased from the same quarter the previous year. Regardless of the weak results of the gross profit margin, the net profit margin of 6.50% is above that of the industry average. CPI International had been rated a sell since May 30, 2007. Pope Resources ( POPE), which engages primarily in managing timber resources by operating in three segments: Fee Timber, Timberland Management & Consulting, and Real Estate, was downgraded to hold. The 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 increase in net income, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year. The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Paper & Forest Products industry. The net income increased by 10.2% when compared with the same quarter one year prior, going from $0.85 million to $0.94 million. The current debt-to-equity ratio, 0.32, is low and below the industry average, implying that there has been successful management of debt levels. Along with this, the company maintains a quick ratio of 3.20, which clearly demonstrates the ability to cover short-term cash needs. Regardless of the drop in revenue, the company managed to outperform against the industry average of 9.8%. In its recent quarterly results, revenue slightly dropped by 6.6% from the same period last year -- the decline in revenue has not hurt the company's bottom line. Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company.
In comparison to the other companies in the Paper & Forest Products industry and the overall market, the firm's return on equity significantly exceeds that of the industry average and is above that of the S&P 500. Pope Resources' 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 39.82%, which is also worse than the performance of the S&P 500. 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. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper than most other stocks in its industry. But due to other concerns, we think the stock is still not a good buy right now. Pope had been rated a buy since July 21, 2006. Legacy Reserves ( LGCY), which engages in the acquisition and development of oil and natural gas properties principally in the Permian Basin and Mid-continent regions of the United States, was initiated with a hold. Legacy Reserves' strengths can be seen in multiple areas, such as its good cash flow from operations and notable return on equity. However, as a counter to these strengths, we also find weaknesses including deteriorating net income and generally poor debt management. Net operating cash flow has significantly increased to $29.26 million when compared with the same quarter last year, growing by 1,161.37%. In addition, the company has also vastly surpassed the industry average cash flow growth rate of 36.17%. When compared with other companies in the oil, gas & consumable fuels industry and the overall market, Legacy Reserves' return on equity significantly trails that of both the industry average and the S&P 500. The firm's debt-to-equity ratio of 0.61 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Despite the fact that LGCY's debt-to-equity ratio is mixed in its results, the company's quick ratio of 0.58 is low and demonstrates weak liquidity. Its net income has fallen drastically by 343.5% when compared with the same quarter one year ago, falling to a loss of $21.10 million from a loss of $4.76 million -- significantly underperforming the S&P 500 and the oil, gas & consumable fuels industry. Additional ratings changes from July 24 are listed below.
|Ticker||Company Name||Change||New Rating||Former Rating|
|ABFS||ARKANSAS BEST CORP||Upgrade||Buy||Hold|
|AMIN||AMERICAN INTERNATIONAL INDS||Downgrade||Sell||Hold|
|ATB||ARLINGTON TANKERS LTD||Upgrade||Buy||Hold|
|CLRO||CLEARONE COMMUNICATIONS INC||Downgrade||Hold||Buy|
|COCO||CORINTHIAN COLLEGES INC||Upgrade||Buy||Hold|
|CPII||CPI INTERNATIONAL INC||Upgrade||Hold||Sell|
|HELE||HELEN OF TROY LTD||Upgrade||Buy||Hold|
|KYCN||KEYSTONE CONS INDUSTRIES INC||Upgrade||Hold||Sell|
|LGCY||LEGACY RESERVES LP||Initiated||Hold|
|MRH||MONTPELIER RE HOLDINGS||Upgrade||Hold||Sell|
|NYB||NEW YORK CMNTY BANCORP INC||Downgrade||Hold||Buy|
|POPE||POPE RESOURCES/DE -LP||Downgrade||Hold||Buy|
|TYC||TYCO INTERNATIONAL LTD||Downgrade||Sell||Hold|
|WIRE||ENCORE WIRE CORP||Downgrade||Hold||Buy|