TSC Ratings' Updates: Whole Foods

The following ratings changes were generated on Thursday, Nov. 6.

We've downgraded Enzon Pharmaceuticals ( ENZN) from hold to sell, driven by its deteriorating net income, disappointing return on equity, generally weak debt management, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

Net income decreased by 102.3% from the same quarter last year, to -$2.02 million. Return on equity also greatly decreased, a signal of major weakness within the corporation, underperforming both the S&P 500 and the biotechnology industry. The debt-to-equity ratio is very high at 7.20 and currently higher than the industry average, implying very poor management of debt levels within the company. However, the company has managed to keep a very strong quick ratio of 4.18, which shows the ability to cover short-term cash needs.

Earnings per share have experienced a steep decline of 104.06% in the most recent quarter year over year. During the past fiscal year, Enzon increased its bottom line by earning $1.14 vs. $0.49 in the prior year. For the next year, the market is expecting a contraction of 143.0% in earnings to negative 49 cents. Shares are down 51.07% on the year, which is worse than the S&P's performance. Naturally, the overall market trend is bound to be a significant factor, and 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.

We've downgraded Perot Systems ( PER), which provides information technology services and business solutions worldwide, from buy to hold. Strengths include its impressive record of earnings per share growth, compelling growth in net income and revenue growth. However, as a counter to these strengths, we find that the company's profitmargins have been poor overall.

EPS are up 25% 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 year, and we feel that this trend should continue, suggesting that the performance of the business is improving. During the past fiscal year, Perot increased its bottom line by earning 92 cents vs. 66 cents in the prior year. This year, the market expects an improvement in earnings to 97 cents. Net income growth of 20% to $30 million from the same quarter last year significantly exceeded that of the S&P 500 and the IT services industry.

Return on equity has improved slightly but is below that of the industry average and the S&P 500. Perot's gross profit margin for is rather low at 17.40%, having decreased from the same quarter the previous year.

We've downgraded Pharmaceutical Product Development ( PPDI) from buy to hold. Strengths include its revenue growth, notable return on equity and expanding profit margins. However, as a counter to these strengths, we find that the stock has had a decline in price during the past year.

PPD's revenue growth of 11.6% since the same quarter last year has slightly outpaced the industry average of 4.5%, appearing to boost EPS. ROE also has improved slightly when compared to the same quarter one year prior, which can be construed as a modest strength in the organization. Its return on equity exceeds that of both the industry average and the S&P 500. Net income growth of 33.9% from the same quarter one year ago has significantly exceeded that of the S&P 500 and the life sciences tools and services industry.

Shares are down 31.8% on the year, apparently dragged down by the decline we have seen in the S&P 500. 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.

We've downgraded oilfield services company Schlumberger ( SLB) from buy to hold. Strengths include its growth in earnings per share, increase in net income and robust revenue growth. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and premium valuation.

EPS improved by 14.7% 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 that we feel should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, Schlumberger increased its bottom line by earning $4.19 vs. $3.01 in the prior year. This year, the market expects an improvement in earnings to $4.76. Net income rose 12.7% over the same quarter a year ago, to $1,526.36 million. Gross profit margin of 38.3% is strong, but it has decreased from the same period last year. Schlumberger's net profit margin of 21% trails the industry average.

Shares are down 48.57% from a year ago, which is worse than the S&P 500's performance, but don't assume that it can now be tagged as cheap and attractive. Based on its current price in relation to its earnings, Schlumberger is still more expensive than most of the other companies in its industry.

We've downgraded Whole Foods Market ( WFMI) from hold to sell, driven by its deteriorating net income, disappointing return on equity, weak operating cash flow, generally weak debt management and generally disappointing historical performance in the stock itself.

Net income decreased by 95.6% over the same quarter a year ago, to $1.5 million, significantly underperforming the S&P 500 and the food and staples retailing industry. ROE has slightly decreased, implying a minor weakness. Whole Foods' ROE is significantly below that of the industry average and is below that of the S&P 500. Net operating cash flow has decreased to $58.57 million, or 39.66% when compared with the same quarter last year. The debt-to-equity ratio of 0.62 is somewhat low overall, but it is high when compared to the industry average. The company's quick ratio of 0.22 is very low and demonstrates very weak liquidity.

Shares are down 79.63% on the year, underperforming the S&P 500. Consistent with the plunge in the stock price, the company's earnings per share are down 95.83% compared with the year-earlier quarter. 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.

Other ratings changes include Global Industries ( GLBL), downgraded from hold to sell, and Rand Capital ( RAND), upgraded from hold to buy.

All ratings changes generated on Nov. 6 are listed below.
Ticker Company Current Change Previous
BBNK Bridge Capital SELL Downgrade HOLD
CAM Cameron International HOLD Downgrade BUY
CKSW ClickSoftware BUY Upgrade HOLD
DOV Dover HOLD Downgrade BUY
ELNK Earthlink HOLD Downgrade BUY
ENZN Enzon SELL Downgrade HOLD
FMS Fresenius HOLD Downgrade BUY
GAXC Global Axcess SELL Downgrade HOLD
GLBL Global Industries SELL Downgrade HOLD
ISBC Investors Bancorp HOLD Upgrade SELL
PER Perot Systems HOLD Downgrade BUY
PPDI Pharmaceutical Product Development HOLD Downgrade BUY
RAND Rand Capital BUY Upgrade HOLD
ROLL RBC Bearings HOLD Downgrade BUY
SLB Schlumberger HOLD Downgrade BUY
UCFC United Community SELL Downgrade HOLD
WFMI Whole Foods SELL Downgrade HOLD

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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