TSC Ratings' Updates: Martha Stewart

The following ratings changes were generated on Thursday, Feb. 26.

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

Net income fell from $396.1 million in the year-ago quarter to -$456.9 million in the most recent quarter, significantly underperforming the S&P 500 and the oil, gas and consumable fuels industry. Quicksilver's 2.4 debt-to-equity ratio is very high and currently higher than the industry average, implying very poor management of debt levels within the company. The 0.4 quick ratio clearly demonstrates an inability to cover short-term cash needs. ROE has greatly decreased since the year-ago quarter, a signal of major weakness within the corporation. EPS declined 218.7%, though the consensus estimate suggests that the company's two-year trend of declining EPS should reverse in the coming year.

Shares have tumbled by 82.2% over 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 downgraded integrated media and merchandise company Martha Stewart Living Omnimedia ( MSO) from hold to sell, driven by its disappointing return on equity, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

ROE has greatly decreased since the same quarter last year, a signal of major weakness. EPS declined 123.8%, but the consensus estimate suggests that the company's yearlong pattern of declining EPS should reverse in the coming year. Net income fell to -$8 million from $33.3 million in the year-ago quarter. Revenue fell 38.5%, significantly faster than the industry average of 20.7%.

Shares have tumbled by 67.9% over the year, underperforming the S&P 500, but that 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.

We've downgraded specialty pharmaceutical company Medicis Pharmaceutical ( MRX) from hold to sell, driven by its decline in the stock price during the past year, deteriorating net income, disappointing return on equity and feeble growth in its earnings per share.

Net income decreased to -$8.6 million in the most recent quarter from $23.2 million in the year-ago quarter, significantly underperforming the S&P 500 and the pharmaceuticals industry. Return on equity also greatly decreased, a signal of major weakness. EPS declined by 142.9%, though the consensus estimate suggests that the company's yearlong trend of declining EPS should reverse in the coming year. Medicis' gross profit margin of 94.5% is very high, having increased from the same quarter last year, and its net profit margin of -6.3% is in line with the industry average.

Shares have plunged 37.4% over the past year, though the performance of the broader market has been even worse. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. Based on its current price in relation to its earnings, Medicis is still more expensive than most of the other companies in its industry.

We've downgraded Perini ( PCR), which offers general contracting, construction management, and design-build services to private clients and public agencies worldwide, from hold to sell, driven by its deteriorating net income, disappointing return on equity, poor profit margins, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

Net income decreased from $22.9 million in the same quarter last year to -$163 million, significantly underperforming the S&P 500 and the construction and engineering industry. ROE also greatly decreased a signal of major weakness. Perini's 6.9% gross profit margin is extremely low, though it has increased since the same period last year. The -10.2% net profit margin significantly underperformed the industry average. EPS declined by 496.4% since the same quarter last year, though the consensus estimate suggests that the company's two-year trend of declining EPS should reverse in the coming year.

Shares have tumbled by 57.4% over 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 downgraded print services provider R.R. Donnelley & Sons ( RRD) from hold to sell, driven by its deteriorating net income, generally weak debt management, disappointing return on equity, poor profit margins and weak operating cash flow.

Net income fell to -$686.9 million in the most recent quarter from -$293.3 million in the year-ago quarter, significantly underperforming the S&P 500 and the commercial services and supplies industry. RRD's 1.8 debt-to-equity ratio is quite high overall and compared with the industry average, and its quick ratio of 1 illustrates its inability to avoid short-term cash problems. ROE is lower than it was in the year-ago quarter, a clear sign of weakness. RRD's 24% gross profit margin is rather low, having decreased from the same quarter a year ago, and its net profit margin of 24.6% is significantly below the industry average. Net operating cash flow has decreased by 17.2% to $326.3 since the year-ago quarter.

Other ratings changes included First Service ( FSRV)and Tween Brands ( TWB), both downgraded from hold to sell.

All ratings changes generated on Feb. 26 are listed below.

Ticker
Company
Current
Change
Previous
ABX Barrick Gold
HOLD
Downgrade
BUY
CBI Chicago Bridge & Iron
HOLD
Upgrade
SELL
DPZ Domino's Pizza
HOLD
Upgrade
SELL
FSRV First Service
SELL
Downgrade
HOLD
FST Forest Oil
SELL
Downgrade
HOLD
IFSIA Interface
SELL
Downgrade
HOLD
KWK Quicksilver Resources
SELL
Downgrade
HOLD
LKI Lazare Kaplan International
SELL
Downgrade
HOLD
MDAS MedAssets
SELL
Initiated
MRX Medicis
SELL
Downgrade
HOLD
MSO Martha Stewart Living
SELL
Downgrade
HOLD
PCR Perini
SELL
Downgrade
HOLD
RGR Sturm Ruger
BUY
Upgrade
HOLD
RMG RiskMetrics Group
SELL
Initiated
RRD R.R. Donnelly
SELL
Downgrade
HOLD
TWB Tween Brands
SELL
Downgrade
HOLD
UFPT UFP Technologies
HOLD
Downgrade
BUY
UIL UIL Holdings
HOLD
Downgrade
BUY
WMS WMS Industries
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.

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