TSC Ratings' Upgrades: Google

The following ratings changes were generated on Tuesday, Oct. 7.

We downgraded Aetna ( AET), one of the nation's largest providers of health care and related benefits, to hold from buy. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share and increase in net income. However, countering those strengths are poor profit margins, weak operating cash flow and a generally disappointing performance in the stock itself.

Revenues rose by 15.2% since the same quarter one year prior, which appears to have helped boost EPS, which rose 14.1% in the most recent quarter over 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, and it suggest improving business performance.

During the past fiscal year, Aetna increased its bottom line by earning $3.48, vs. $2.97 in the prior year. This year, the market expects earnings to improve again, to $4. The current debt-to-equity ratio, 0.39, is below the industry average, implying successful management of debt levels.

Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.34 is very weak and demonstrates a lack of ability to pay short-term obligations. Net operating cash flow has decreased to $186.50 million, or by 41.77% when compared with the same quarter last year. Despite a decrease in cash flow, Aetna is still fairing well by exceeding its industry average cash flow growth rate of -56.22%. The gross profit margin for Aetna is currently lower than desirable, coming in at 27.80%. 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 6.10% is above that of the industry average.

We recently downgraded El Paso ( EP) to hold from buy. Despite strengths in net income increase, expanding profit margins and good cash flow from operations, the Texas-based energy company also exhibits weaknesses such as a generally disappointing stock performance and poor debt management.

The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed the S&P 500 and the oil, gas and consumable fuels industry average. Net income increased by 15.1% when compared with the same quarter one year prior, from $166.00 million to $191.00 million. El Paso's relatively high gross profit margin of 62.4% has increased from the same quarter a year ago, and its net profit margin of 16.60% is above that of the industry average. Current return on equity exceeded its ROE from the same quarter one year prior, a clear sign of strength within the company.

The debt-to-equity ratio is very high at 2.34 and currently higher than the industry average, implying poor management of debt levels within the company. The company also manages to maintain a quick ratio of 0.35, demonstrating an inability to cover short-term cash needs. Shares are down 40.72% on the year, underperforming the S&P 500, but don't 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, El Paso is still more expensive than most of the other companies in its industry.

We've downgraded global technology company Google ( GOOG) from buy to hold. The company exhibits robust revenue growth, a largely solid financial position with reasonable debt levels by most measures and an impressive record of earnings per share growth. However, we find that the stock has had a generally disappointing performance in the past year.

Google's revenue growth has slightly outpaced the industry average of 36.8%, rising by 38.6% over the same quarter last year, which appears to have helped boost EPS. The company has no debt to speak of, and it maintains a quick ratio of 6.56, clearly demonstrating its ability to cover short-term cash needs. Google's current return on equity has slightly decreased from the same quarter one year prior but exceeds average ROE for the Internet software and services industry and the S&P 500.

Despite any rallies, shares are down by 37.52% from a year ago, underperforming 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. The stock's sharp decline last year could also be a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. Nevertheless, we feel the stock is still not a good buy right now.

We downgraded Homex Development ( HXM), a Mexican developer of entry-level and middle-income housing, from buy to hold. Homex exhibits robust revenue growth, an impressive record of EPS growth and a compelling growth in net income, but the stock performance has been generally disappointing, and the company's operating cash flow is weak.

At 29% over the same quarter a year ago, revenue growth has slightly outpaced the industry average of 28%, and Homex reported significant EPS improvement in the most-recent quarter. We expect the company's two-year trend of EPS growth to continue, suggesting improving business performance. During the past fiscal year, Homex increased its bottom line by earning $3.65 vs. $2.23 in the prior year. This year, the market expects further earnings improvement to $4.87.

Homex's gross profit margin is lower than desirable at 34.1%, in spite of having increased from the same period last year. Depite this, Homex's net profit margin of 16.4% significantlyoutperformed against the industry. Net operating cash flow has significantly decreased to -$108.80 million, or 494.49% when compared with the same quarter last year, but it still significantly exceeds the industry average of -2422.81%. Shares are down by 41.80% from a year ago, underperforming 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. The fact that the stock has come down in price could be help make the stock attractive down the road, but for now, we believe that it is too soon to buy.

We've downgraded State Street ( STT) from buy to hold. The financial holding company's strengths can be seen in multiple areas, such as its robust revenue growth, growth in earnings per share and compelling growth in net income, but as a counter to these strengths, we also find weaknesses such as a generally disappointing performance in the stock itself and disappointing return on equity.

State Street's revenue growth of 15.1% over the quarter one year prior appears to have helped boost EPS, which improved 26.2% over the same period. The company's two-year trend of positive EPS growth should continue, suggesting improving business performance. During the past fiscal year, State street increased its bottom line by earning $3.48 vs. $3.26 in the prior year, and the market expects this to increase to $5.21 this year. Its current debt-to-equity ratio of 1.82 is still below the industry average, suggesting that this level of debt is acceptable within the capital markets industry.

The company's current return on equity has slightly decreased from the same quarter one year prior, implying a minor weakness in the organization. State Street has outperformed the industry average for ROE but underperformed the S&P 500. Shares are down 37.66% on the year, again underperforming the S&P 500. This dip in price could make the stock attractive down the road, but we believe it's still too soon to buy State Street.

Other ratings changes include Sierra Bancorp ( BSRR), which we upgraded from hold to buy, and Solarfun Power Holdings ( SOLF), which we downgraded from hold to sell.

All ratings changes generated on October 7 are listed below.
Ticker Company Current Change Previous
ACM Aecom Technology SELL Downgrade HOLD
ACTU Actuate HOLD Downgrade BUY
AET Aetna HOLD Downgrade BUY
BGF B&G Foods HOLD Downgrade BUY
BOLT Bolt Technology HOLD Downgrade BUY
BSRR Sierra Bancorp BUY Upgrade HOLD
CBD Companhia Brasiliera HOLD Downgrade BUY
CE Celanese CORP HOLD Downgrade BUY
CLS Celestica HOLD Downgrade BUY
COVR Cover-All Technologies SELL Downgrade HOLD
CPHD Cepheid SELL Downgrade HOLD
CVGI Commercial Vehicle Group SELL Downgrade HOLD
DMAN DemandTec SELL Initiated
DTLK Datalink HOLD Downgrade BUY
EDGW Edgewater Technology SELL Downgrade HOLD
EGN Energen HOLD Downgrade BUY
EP El Paso HOLD Downgrade BUY
GASS StealthGas BUY Upgrade HOLD
GCBC Greene County Bancorp BUY Upgrade HOLD
GILD Gilead Sciences HOLD Downgrade BUY
GOOG Google HOLD Downgrade BUY
GSOL Global Sources HOLD Downgrade BUY
HDSN Hudson Technologies HOLD Downgrade BUY
HEW Hewitt Associates HOLD Downgrade BUY
HPCO Hallador Petroleum SELL Downgrade HOLD
HRBN Harbin Electric HOLD Downgrade BUY
HS HealthSpring HOLD Downgrade BUY
HXM Homex Development HOLD Downgrade BUY
JEC Jacobs Engineering Group HOLD Downgrade BUY
MALL PC Mall HOLD Downgrade BUY
MEI Methode Electronics HOLD Downgrade BUY
MGIC Magic Software Enterprises HOLD Downgrade BUY
QNTA Quanta Capital Holdings HOLD Upgrade SELL
SM St. Mary Land & Exploration HOLD Downgrade BUY
SOLF Solarfun Power Holdings SELL Downgrade HOLD
STT State Street HOLD Downgrade BUY
TBHS Bank Holdings SELL Downgrade HOLD
WBC Wabco Holdings SELL Downgrade HOLD
YORW York Water HOLD Downgrade BUY

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.

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

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