TSC Ratings' Updates: Allergan

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 Sept. 15.

Allergan ( AGN) has been upgraded from hold to buy. Allergan develops and commercializes pharmaceutical and medical device products for the ophthalmic, neurological, medical aesthetics, medical dermatological, breast aesthetics, obesity intervention and other specialty markets worldwide. The company's strengths can be seen in multiple areas, such as its robust revenue growth, growth in earnings per share, increase in net income, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared with such things as earnings and book value.

AGN's revenue growth has slightly outpaced the industry average of 14.4%. Since the same quarter one year prior, revenue rose by 19.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

AGN has improved earnings per share by 6.7% 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. During the past fiscal year, AGN turned its bottom line around by earning $1.62 vs. a loss of 61 cents in the prior year. This year, the market expects an improvement in earnings ($2.59 vs. $1.62).

The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the pharmaceuticals industry average. The net income increased by 6.9% when compared with the same quarter one year prior, going from $137.80 million to $147.30 million.

The gross profit margin for AGN is currently very high, coming in at 86.10%. 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 12.60% trails the industry average.

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. Despite the fact that AGN's debt-to-equity ratio is mixed in its results, the company's quick ratio of 2.37 is high and demonstrates strong liquidity.

AGN had been rated a hold since May 27, 2008.

O'Reilly Auto ( ORLY) has been upgraded from hold to buy. O'Reilly Automotive operates as a specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the U.S. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in net income, expanding profit margins, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has posted a somewhat disappointing return on equity.

The revenue growth came in higher than the industry average of 9.3%. Since the same quarter one year prior, revenue has slightly increased by 9.5%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

The gross profit marging of 48.10% for ORLY we consider to be strong. It hasincreased from the same quarter the previous year. Along with this, the net profit margin of 7.90% is above that of the industry average.

Net operating cash flow has significantly increased by 52.63% to $96.61 million when compared with the same quarter last year. In addition, ORLY has also vastly surpassed the industry average cash flow growth rate of -20.05%.

The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the specialty retail industry. The net income increased by 7.5% when compared with the same quarter one year prior, going from $51.90 million to $55.79 million.

ORLY's debt-to-equity ratio is very low at 0.04 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.44 is very weak and demonstrates a lack of ability to pay short-term obligations.

ORLY had been rated a hold since June 6, 2008.

Graphic Packaging ( GPK) has been upgraded from sell to hold. Graphic Packaging, together with its subsidiaries, provides paperboard packagingsolutions for various products to multinational and other consumer products companies. It operates in two segments, paperboard packaging and containerboard/other. The company's strengths can be seen in multiple areas, such as its robust revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we also find weaknesses including generally poor debt management, poor profit margins and a generally disappointing performance in the stock itself.

GPK's very impressive revenue growth greatly exceeded the industry average of 13.8%. Since the same quarter one year prior, revenue rose by 83.2%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

GPK has 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. During the past fiscal year, GPK continued to lose money, posting a loss of 24 cents vs a loss of 48 cents in the prior year.

The gross profit margin for GPK is rather low; currently it is at 18.50%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -0.40% trails that of the industry average.

The debt-to-equity ratio is very high at 3.44 and currently higher than the industry average, implying that there is very poor management of debt levels within the company. To add to this, GPK has a quick ratio of 0.68, demonstrating the lack of ability of the company to cover short-term liquidity needs.

GPK had been rated a sell since Feb. 19, 2008.

Analog Devices ( ADI) has been downgraded from buy to hold. Analog Devices engages in the design, manufacture and marketing of analog, mixed-signal, and digital signal processing integrated circuits used in industrial, communication, computer and consumer applications. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, compelling growth in net income and revenue growth. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year.

ADI has improved earnings per share by 15.8% 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, ADI increased its bottom line by earning $1.51 vs. $1.49 in the prior year. This year, the market expects an improvement in earnings ($1.73 vs. $1.51).

The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the semiconductors and semiconductor equipment industry average. The net income increased by 15.1% when compared with the same quarter one year prior, going from $120.44 million to $138.61 million.

Net operating cash flow has slightly increased to $196.15 million or 2.84% when compared with the same quarter last year. Despite an increase in cash flow, ADI's cash flow growth rate is still lower than the industry average growth rate of 15.23%.

The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared with other companies in the semiconductors & semiconductor equipment industry and the overall market, ADI's return on equity exceeds that of both the industry average and the S&P 500.

ADI's 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 25.88%, which is also worse that the performance of the S&P 500 Index. 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 (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.

ADI had been rated a buy since May 13, 2008.

Chipotle Mexican Grill ( CMG) has been downgraded from hold to sell. Chipotle Mexican Grill engages in the development and operation of fast-casual, fresh Mexican food restaurants. Chipotle Mexican Grill operates independently of McDonald's as of Oct. 5, 2006. 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. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and poor profit margins.

CMG's revenue growth has slightly outpaced the industry average of 23.4%. Since the same quarter one year prior, revenue rose by 24.2%. Growth in the company's revenue appears to have helped boost the earnings per share.

CMG's debt-to-equity ratio is very low at 0.01 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with this, the company maintains a quick ratio of 2.82, which clearly demonstrates the ability to cover 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 hotels, restaurants & leisure industry and the overall market on the basis of return on equity, CMG has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.

CMG's stock share price has done very poorly compared with where it was a year ago: Despite any rallies, the net result is that it is down by 31.35%, which is also worse that the performance of the S&P 500 Index.

Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, CMG is still more expensive than most of the other companies in its industry.

The gross profit margin for CMG is rather low; currently it is at 22.40%. It hasdecreased from the same quarter the previous year. Along with this, the net profit margin of 7.20% trails that of the industry average.

CMG had been rated a hold since July 7, 2007.

Additional ratings changes from Sept. 15 are listed below.
Ticker Company Name Change New Rating Former Rating
ADI Analog Devices Downgrade Hold Buy
AGN Allergan Inc. Upgrade Buy Hold
BBOX Black Box Corp Upgrade Buy Hold
CMG.B Chipotle Mexican Grill Downgrade Sell Hold
CSFL Centerstate Banks of Florida Upgrade Buy Hold
ESMC Escalon Medical Corp Downgrade Sell Hold
GPK Graphic Packaging Holding Upgrade Hold Sell
HYDI Hydromer Inc. Upgrade Hold Sell
MIG Meadowbrook Insurance Group Upgrade Buy Hold
ORLY O'Reilly Automotive Upgrade Buy Hold
RMTR Ramtron International Downgrade Hold Buy
SUTR Sutor Technology Group Initiated Sell

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

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