TSC Ratings' Updates: Watts Water

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 August 27.

Watts Water Technologies ( WTS) was upgraded from hold to buy. Watts Water Technologies, through its subsidiaries, designs, manufactures and sells water safety and flow control products primarily for the water quality, water safety, water flow control and water conservation markets in North America, Europe and China. The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity.

The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the machinery industry average. The net income increased by 11.4% when compared with the same quarter one year prior, going from $17.77 million to $19.80 million.

Despite its growing revenue, the company underperformed as compared with the industry average of 14.5%. Since the same quarter one year prior, revenue rose by 11%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

The current debt-to-equity ratio, 0.47, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.16, which illustrates the ability to avoid short-term cash problems.

Net operating cash flow has significantly increased by 103.17% to $25.60 million when compared with the same quarter last year. In addition, WTS has also vastly surpassed the industry average cash flow growth rate of -16.04%.

37.10% is the gross profit margin for WTS which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 5.10% trails the industry average.

WTS had been rated a hold since Nov. 26, 2007.

Discover Financial Services ( DFS) has been upgraded from sell to hold. Discover Financial Services operates as a credit card issuer and electronic payment services company primarily in the U.S. The company's strengths can be seen in multiple areas, such as its increase in net income, revenue growth and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and poor profit margins.

The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the consumer finance industry. The net income increased by 11.9% when compared with the same quarter one year prior, going from $209.24 million to $234.15 million.

DFS' revenue growth trails the industry average of 12.9%. Since the same quarter one year prior, revenue has slightly increased by 1.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.

When compared with other companies in the consumer finance industry and the overall market, DFS's return on equity is below that of both the industry average and the S&P 500.

The gross profit margin for DFS is currently lower than what is desirable, coming in at 29.20%. It has decreased from the same quarter the previous year. Regardless of the weak results of thegross profit margin, the net profit margin of 15.70% is above that of the industry average.

Looking at the price performance of DFS's shares over the past 12 months, there is not much good news to report -- the stock is down 35.39% and it has underperformed the S&P 500. In addition, the company's earnings per share are lower today than the year-earlier quarter. Despite the heavy decline in its share price, this stock is still more expensive (when compared with its current earnings) than most other companies in its industry.

DFS has been rated a sell since July 15, 2008.

Granite Construction ( GVA) has been upgraded from sell to hold. Granite Construction, together with its subsidiaries, operates as a heavy civil contractor and a construction materials producer for public and private sector clients in the U.S. The company operates through two segments: Granite West and Granite East. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, notable return on equity and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income.

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 construction & engineering industry and the overall market on the basis of return on equity, GVA has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.

The revenue fell significantly faster than the industry average of 54.3%. Since the same quarter one year prior, revenue has slightly dropped by 9.9%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.

Despite currently having a low debt-to-equity ratio of 0.41, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.12 is sturdy.

GVA earnings per share declined by 35.2% in the most-recent quarter compared with the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, GVA increased its bottom line by earning $2.70 vs. $1.94 in the prior year. For the next year, the market is expecting a contraction of 10.0% in earnings ($2.43 vs.$2.70).

GVA had been rated a sell since Feb. 1, 2008.

Mediacom Communications ( MCCC) has been downgraded from hold to sell. Mediacom Communications, through its subsidiaries, develops cable systems to provide entertainment, information and telecommunications services in the U.S. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we find that the stock has had a decline in price during the past year.

MCCC's revenue growth has slightly outpaced the industry average of 4.9%. Since the same quarter one year prior, revenue has slightly increased by 7.6%. Growth in the company's revenue appears to have helped boost the earnings per share.

MCCC reported significant earnings per share improvement in the most-recent quarter compared with the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, MCCC continued to lose money by earning -88 cents vs. -$1.13 in the prior year. This year, the market expects an improvement in earnings (-33 cents vs. -88 cents).

Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 0.28 is very low and demonstrates very weak liquidity.

The gross profit margin for MCCC is rather high; currently it is at 58.50%. Regardless of MCCC's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 6.00% trails the industry average. MCCC is off 11.36% from its price level of one year ago, reflecting the general market trend and ignoring their higher earnings per share compared to the year-earlier quarter. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.

MCCC had been rated a hold since Nov. 8, 2007.

Perfect World ( PWRD) has been initiated at hold. Perfect World, through its subsidiaries, operates as an online game developer and operator in the People's Republic of China. It primarily develops three-dimensional (3D) online games based on its proprietary Angelica 3D game engine and game development platform. The company's strengths can be seen in multiple areas, such as its notable return on equity, robust revenue growth and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we find that the growth in the company's earnings per share has not been good.

When compared with other companies in the software industry and the overall market, PWRD's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.

PWRD's very impressive revenue growth greatly exceeded the industry average of 16.1%. Since the same quarter one year prior, revenue leaped by 183.4%. Growth in the company's revenue appears to have helped boost the earnings per share.

PWRD 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. Along with this, the company maintains a quick ratio of 3.13, which clearly demonstrates the ability to cover short-term cash needs.

The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the software industry. The net income increased by 244.8% when compared with the same quarter one year prior, rising from $6.95 million to $23.98 million.

The gross profit margin for PWRD is currently very high, coming in at 89.30%. It hasincreased from the same quarter the previous year. Along with this, the net profit margin of 49.20% significantly outperformed against the industry average.

Additional ratings changes from Aug. 27 are listed below.

Ticker Company Name Change New Rating Former Rating
BECN Beacon Roofing Supply Inc. Upgrade Buy Hold
COKE Coca-Cola Bottling Co. Consolidated Upgrade Hold Sell
DFS Discover Financial Services Inc. Upgrade Hold Sell
FFBC First Financial Bancorp Upgrade Buy Hold
FRZ Reddy Ice Holdings Inc. Upgrade Hold Sell
GVA Granite Construction Inc. Upgrade Buy Hold
IMRX Imarx Therapeutics Inc. Initiated Sell
MCCC Mediacom Communications Corp. Upgrade Hold Sell
MCGC MCG Capital Corp. Downgrade Sell Hold
MFLX Multi-Fineline Electron Inc. Downgrade Hold Buy
PEI Pennsylvania Real Estate Investment Downgrade Sell Hold
PERY Ellis Perry International Inc. Downgrade Hold Buy
PWRD Perfect World Initiated Hold
TCCO Technical Communications Upgrade Hold Sell
TESS Tessco Technologies Inc. Upgrade Buy Hold
VOLT Voltaire Ltd Initiated Sell
WTS Watts Water Technologies Upgrade Buy Hold

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

More from Investing

Quick Read: 3 Things for Investors to Know Before Wednesday's Trading Session

Quick Read: 3 Things for Investors to Know Before Wednesday's Trading Session

Replay: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron

Replay: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

Adobe Isn't Just Going After Shopify With Its Latest Acquisition

Adobe Isn't Just Going After Shopify With Its Latest Acquisition

Experts Break Down GDPR Risks for Investors

Experts Break Down GDPR Risks for Investors