TSC Ratings' Updates: Citigroup

The following ratings changes were generated on Tuesday, Nov. 25.

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

Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior, a signal of major weakness within the corporation. Citigroup's return on equity significantly trails that of both the industry average and the S&P 500. The debt-to-equity ratio is very high at 3.14 and currently higher than the industry average, implying very poor management of debt levels within the company. Net income has decreased significantly when compared with the same quarter a year ago, falling from $2,212 million to -$2,815 million and underperforming both the S&P 500 and the diversified financial services industry.

Citigroup has experienced a steep decline of 261.4% in earnings per share in the most recent quarter in comparison with its performance from the same quarter a year ago. Earnings per share have declined over the last two years, and we anticipate that this should continue in the coming year. During the past fiscal year, Citigroup reported lower earnings of 67 cents vs. $4.25 in the prior year. For the next year, the market is expecting a contraction of 413.4% in earnings to -$2.10.

Shares are down 780.98% on the year, underperforming 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 upgraded CNX Gas ( CXG) from sell to hold. Strengths include its robust revenue growth, compelling growth in net income and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including premium valuation and a decline in the stock price during the past year.

Revenue leaped by 98.6% since the same quarter a year ago, greatly exceeding the industry average of 29.9% growth and boosting EPS.Net income increased by 115.4%, from $31.3 million to $67.4 million, outperforming the S&P 500 and the oil, gas and consumable fuels industry. CNX reported significant EPS improvement in the most recent quarter compared with the same quarter a year ago. This company has reported somewhat volatile earnings recently, but we feel it is poised for EPS growth in the coming year. During the past fiscal year, it reported lower earnings of 90 cents vs. $1.05 in the prior year. This year, the market expects an improvement in earnings to $1.59.

Compared with a year ago, CXG's share price has not changed much, due to the relatively weak year-over-year performance of the overall market and the company's stagnant earnings. We do not see anything in this company's numbers that would change the one-year trend. It was down over the last 12 months, and it could be down again in the next 12. Naturally, a bull or bear market could sway the movement of this stock.

We've downgraded Grey Wolf ( GW), which provides onshore contract drilling services to the oil and natural gas industry in the U.S., from buy to hold. Strengths include its revenue growth, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and weak operating cash flow.

Revenue increased slightly since the same quarter last year, by 4.5%, trailing the industry average of 25.7%, but EPS declined. The current debt-to-equity ratio, 0.37, is low and is below the industry average, implying successful management of debt levels. The company also maintains a quick ratio of 4.37, which clearly demonstrates the ability to cover short-term cash needs.

Net income has significantly decreased by 31.7% when compared with the same quarter one year ago, falling from $35.59 million to $24.31 million, underperforming the energy equipment and services industry but outperforming the S&P 500. Net operating cash flow has decreased to $23.14 million or 48.99% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

Share price is not only higher than what it was a year ago, but it has also outperformed the S&P 500 over the same period, despite the company's weak earnings results. Nevertheless, there is currently no conclusive evidence that warrants the purchase or sale of this stock.

We've downgraded PPG Industries ( PPG), which manufactures coatings, glass and chemical products, from buy to hold. Strengths include its robust revenue growth, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and a decline in the stock price during the past year.

Revenue rose by 37.5% since the same quarter one year prior, outpacing the industry average growth rate of 25.5%. EPS, however, declined. Net operating cash flow has increased to $451.00 million, or 41.82% when compared with the same quarter last year, exceeding the industry average cash flow growth rate of 16.04%. PPG's gross profit margin of 36.1% is strong, thought it has decreased from the same period last year. Its net profit margin of 2.8% is significantly lower than the same period one year prior.

Net income has decreased by 38.7% when compared with the same quarter one yearago, falling from $191 million to $117 million, underperforming the S&P 500 and the chemicals industry. Shares are down 37.3%, reflecting the overall decline in the broad market and the sharp decline in the company's earnings per share, down 45.7%. 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 Weatherford International ( WFT), which provides equipment and services used for the drilling, evaluation, completion, production, and intervention of oil and natural gas wells worldwide, from buy to sell, driven by its weak operating cash flow and generally disappointing historical performance in the stock itself.

Net operating cash flow has decreased to $203.14 million, or 20.41% when compared with the same quarter last year. In addition, the company's cash generation rate is significantly lower than the industry average. Weatherford's debt-to-equity ratio of 0.67 is somewhat low overall, but it is high when compared with the industry average. The company's quick ratio of 1.05 is sturdy. Its 42.8% gross profit margin is strong, though it has decreased from the same period last year. Weatherford's net profit margin of 14.6% trails the industry average.

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, Weatherford underperformed the energy equipment and services industry but outperformed the S&P 500.

Shares are down 63.3% on the year, underperforming the S&P 500. 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 Stage Stores ( SSI) and Novatel Wireless ( NVTL), both downgraded from hold to sell.

All ratings changes generated on Nov. 25 are listed below.
Ticker Company
Current
Change
Previous
AMS American Shared Hospital Services
SELL
Downgrade
HOLD
BFED Beacon Federal Bancorp
SELL
Initiated
C Citigroup
SELL
Downgrade
HOLD
CIX CompX International
SELL
Downgrade
HOLD
CNS Cohen & Steers
FROZEN
BUY
CSA Cogdell Spencer
HOLD
Upgrade
SELL
CVI CVR Energy
SELL
Initiated
CXG CNX Gas
HOLD
Upgrade
SELL
DCBF DCB Financial
SELL
Downgrade
HOLD
FFKT Farmers Capital Bank
HOLD
Downgrade
BUY
FUQI Fuqi International
SELL
Initiated
GW Grey Wolf
HOLD
Downgrade
BUY
HGR Hanger Orthopedic
BUY
Upgrade
HOLD
HHS Harte Hanks
FROZEN
HOLD
IDSA Industrial Services of America
HOLD
Downgrade
BUY
MCBC Macatawa Bank
SELL
Downgrade
HOLD
NVTL Novatel Wireless
SELL
Downgrade
HOLD
PPG PPG Industries
HOLD
Downgrade
BUY
ROFO Rockford
SELL
Downgrade
HOLD
SFST Southern First Bankshares
FROZEN
HOLD
SSI Stage Stores
SELL
Downgrade
HOLD
UDRL Union Drilling
HOLD
Upgrade
SELL
WFT Weatherford
SELL
Downgrade
HOLD
XTXI Crosstex Energy
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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