TSC Ratings' Updates: Quanta

The following ratings changes were generated on Wednesday, Nov. 12.

We've downgraded Alcon ( ACL), which engages in the development, manufacture, and marketing of pharmaceuticals, surgical equipment and devices and consumer eye care products to treat eye diseases and disorders, from buy to hold. Strengths include its impressive record of earnings per share growth, revenue growth 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.

Alcon reported significant earnings-per-share improvements in the most recent quarter compared with the same quarter a year ago, and during the past fiscal year, it earned $5.25 vs. $4.37 in the prior year. This year, the market expects further improvement to $5.92. Since the same quarter last year, revenue rose by 14.1%, compared with the industry average of 18% growth. The 0.31 debt-to-equity ratio is low, but it's higher than the industry average. The quick ratio of 1.69 is high, demonstrating strong liquidity.

Net income decreased by 51% over the same quarter one year prior, to $627.1 million, outperforming the S&P 500 but underperforming the health care equipment and supplies industry. Shares are down 43.42% on the year, an underperformance of the S&P 500. 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 Acuity Brands ( AYI), which engages in the design, production, and distribution of lighting fixtures, from buy to hold. Strengths include its growth in earnings per share, notable return on equity and attractive valuation levels. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income and weak operating cash flow.

Acuity Brands improved EPS by 5.2% in the most recent quarter compared with the same quarter a year ago and has demonstrated a trend of positive EPS growth over the past two years, which we feel should continue, suggesting improving business performance. During the past fiscal year, Acuity increased its bottom line by earning $3.57 vs. $2.93 in the prior year, and the market expects further improvement this year to $3.83.

Return on equity increased from the same quarter one year prior, a clear sign of strength within the company. On the basis of ROE, Acuity outperformed both the electrical equipment industry and the S&P 500. Revenue dropped by 3.3% since the same quarter a year ago, compared with the industry average of 12.5%. Net income decreased by 18.6%, to $41.91 million. Net operating cash flow has declined marginally to $115.19 million, or 2.16% when compared with the same quarter last year. Acuity is in line with the industry average cash flow growth rate of -11.64%.

We've downgraded Enstar Group ( ESGR) from hold to sell, driven by its generally disappointing historical performance in the stock itself, premium valuation and weak operating cash flow.

Net operating cash flow has significantly decreased to -$40.12 million, or 449.73% when compared with the same quarter last year. In addition, compared with the industry average, the firm's growth rate is much lower. Enstar's debt-to-equity ratio of 0.68 is somewhat low overall, but it is high when compared to the industry average. On the basis of ROE, Enstar underperforms both the insurance industry and the S&P 500.

Shares have plunged 42.1% on the year, dragged down in part by the decline in the S&P 500. Don't assume, however, that Enstar can now be tagged as cheap and attractive. Based on its current price in relation to its earnings, it is still more expensive than most of the other companies in its industry.

We've downgraded Lincoln Electric ( LECO), which engages in the manufacture and resale of welding and cutting products 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 also find weaknesses including a generally disappointing performance in the stock itself, weak operating cash flow and poor profit margins.

Lincoln Electric has improved earnings per share by 39.1% 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, which we feel should continue. During the past fiscal year, it increased its bottom line by earning $4.67 vs. $4.07 in the prior year, and this year, the market expects further improvement in earnings to $5.59. Net income increased by 38.5% over the same quarter a year ago, to $69.21 million, exceeding the average net income growth of the S&P 500 and the machinery industry. The return on equity has improved slightly when compared with the same quarter one year prior, which can be construed as a modest strength in the organization. On the basis of ROE, Lincoln Electric has underperformed the industry average but outperformed the S&P 500.

Net operating cash flow has declined marginally to $96.06 million, or 0.61% when compared with the same quarter last year. Despite a decrease in cash flow, Lincoln is still fairing well by exceeding its industry average cash flow growth rate of -15.08%. Shares are down 43.79% on the year, which is worse than the performance of the S&P 500. 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 Quanta Services ( PWR), which offers end-to-end network solutions to the electric power, gas, telecommunications, cable television and specialty services industries, from buy to hold. Strengths include its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and increase in net income. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and poor profit margins.

Revenue leaped by 60.6% since the same quarter one year ago, exceeding the industry average growth rate of 32.6%, but EPS have declined. Quanta's debt-to-equity ratio is very low at 0.18 and is currently below that of the industry average, implying very successful management of debt levels. Quanta also has a quick ratio of 1.57, which demonstrates the ability of the company to cover short-term liquidity needs. Its EPS from the most recent quarter came in slightly below the year-earlier quarter, but we feel Quanta is poised for EPS growth in the coming year. During the past fiscal year, it increased its bottom line by earning 88 cents vs. 11 cents in the prior year, and this year, the market expects an improvement in earnings to 89 cents.

Quanta's gross profit margin is rather low at 16.8%, having decreased since the same quarter last year. The net profit margin of 5.2%, however, is above the industry average. Shares are down 52.52% on the year, underperforming the S&P 500, but do not assume that it can now be tagged as cheap and attractive. Based on its current price in relation to its earnings, PWR is still more expensive than most of the other companies in its industry.

Other ratings changes include 3D Systems ( TDSC) and Investors Capital ( ICH), both downgraded from hold to sell.

All ratings changes generated on Nov. 12 are listed below.
Ticker Company
Current
Change
Previous
ACL Alcon
HOLD
Downgrade
BUY
AYI Acuity Brands
HOLD
Downgrade
BUY
BABY Natus Medical
HOLD
Downgrade
BUY
CAEI China Architectural
SELL
Initiated
ESGR Enstar Group
SELL
Downgrade
HOLD
GEF.B Greif
HOLD
Downgrade
BUY
IBCP Independent Bank
SELL
Downgrade
HOLD
IBNK Integra Bank
SELL
Downgrade
HOLD
ICH Investors Capital
SELL
Downgrade
HOLD
IDXX Idexx Labs
HOLD
Downgrade
BUY
IMKTA Ingles Markets
HOLD
Downgrade
BUY
LECO Lincoln Electric
HOLD
Downgrade
BUY
NROM Noble Romans
SELL
Downgrade
HOLD
PWR Quanta Services
HOLD
Downgrade
BUY
RVR White River Capital
SELL
Downgrade
HOLD
TDSC 3D Systems
SELL
Downgrade
HOLD
TLVT Telvent
SELL
Downgrade
HOLD
VCI Valassis
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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