TSC Ratings' Updates: Inergy

The following ratings changes were generated on Tuesday, March 10.

We've downgraded property and casualty insurer Chubb ( CB) from buy to hold. Strengths include its largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, we also find weaknesses including weak operating cash flow, poor profit margins and a decline in the stock price during the past year.

Chubb's debt-to-equity ratio is very low at 0.3 is currently below the industry average, implying very successful management of debt levels. Revenue fell by 12.6% but still outperformed against the industry average, since the same quarter a year ago, and EPS decreased. Chubb's 19.7% gross profit margin is rather low, having decreased from the year-ago quarter. Its 13.3% net profit margin significantly outperformed the industry average. Net operating cash flow decreased by 36.1% to $400 million since the same quarter a year ago.

We've downgraded CB Richard Ellis Group ( CBG) 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 decreased from $122.5 million in the same quarter last year to -$1.1 billion, significantly underperforming the S&P 500 and the real estate management and development industry. The 25.7 debt-to-equity ratio is very high and above the industry average, implying very poor management of debt levels, and the 0.7 quick ratio demonstrates the company's lack of ability to cover short-term liquidity needs. Return on equity has greatly decreased compared with the year-ago quarter, a signal of major weakness within the corporation. The 12.2% gross profit margin is extremely low, having decreased from the year-ago quarter, and the 84.9% net profit margin is significantly below the industry average. Net operating cash flow decreased 57.6% compared with the year-ago quarter to $101 million.

We've downgraded property and casualty insurance company CNA Financial ( CNA) from hold to sell, driven by its deteriorating net income, disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

Net income decreased from $164 in the year-ago quarter to -$336 million, significantly underperforming the S&P 500 and the insurance industry. ROE also greatly decreased, a signal of major weakness. Net operating cash flow fell by 43.5% to $297 million, and EPS decline 322%. However, the consensus estimate suggests that the company's two-year trend of declining EPS should reverse in the coming year.

Shares tumbled 75% over the past 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 real estate investment trust Equity Residential ( EQR) from hold to sell, driven by its deteriorating net income, generally weak debt management, disappointing return on equity, poor profit margins and generally disappointing historical performance in the stock itself.

Net income decreased to -$31.2 million in the most recent quarter from $123.3 million in the year-ago quarter, significantly underperforming the S&P 500 and the REITs industry. The company's debt-to-equity ratio of 2.1 is very high and currently higher than the industry average, implying very poor management of debt levels within the company. ROE slightly decreased from the same quarter a year ago, implying a minor weakness in the organization. Equity Residential's 8.4% gross profit margin is extremely low, having decreased significantly from the same period last year, and its net profit margin of -5.8% is significantly below the industry average.

Shares are down 52.7% over the past year, underperforming the S&P 500, and EPS are down 320%. But don't assume that the stock's decline means it's now 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 upgraded Inergy ( NRGY), which engages in the sale, distribution, storage, marketing, trading, processing and fractionation of propane and natural gas, from hold to buy. This rating is driven by the company's revenue growth, increase in net income, good cash flow from operations, impressive record of earnings per share growth and notable return on equity. We feel these strengths outweigh the fact that the company has had generally poor debt management on most measures that we evaluated.

Revenue increased by 3.8% since the same quarter last year, helping to boost EPS significantly. We anticipate EPS to continue to grow in the coming year. Net income grew 55%, from $36.9 million in the year-ago quarter to $57.2 million, and net operating cash flow increased by 149.6% to $11.4 million. ROE improved slightly, underperforming the industry average but outperforming the S&P 500.

Other ratings changes included Robbins & Myers ( RBN), downgraded from buy to hold, and Vivus ( UBSI), downgraded from hold to sell.

All ratings changes generated on March 10 are listed below.

  
Ticker
Company
Current
Change
Previous
ABC
AmerisourceBergen
HOLD
Downgrade
BUY
CASY
Casey's General Stores
HOLD
Downgrade
BUY
CB
Chubb
HOLD
Downgrade
BUY
CBG
CB Richard Ellis Group
SELL
Downgrade
HOLD
CNA
CNA Financial
SELL
Downgrade
HOLD
CODI
Compass Diversified Holdings
SELL
Downgrade
HOLD
EQR
Equity Residential
SELL
Downgrade
HOLD
HEI
Heico
HOLD
Downgrade
BUY
HTE
Harvest Energy Trust
HOLD
Upgrade
SELL
LKFN
Lakeland Financial
HOLD
Downgrade
BUY
MPS
MPS Group
SELL
Downgrade
HOLD
NRGY
Inergy
BUY
Upgrade
HOLD
RBN
Robbins & Myers
HOLD
Downgrade
BUY
ROSG
Rosetta Genomics
SELL
Initiated
RTN
Raytheon
HOLD
Downgrade
BUY
SO
Southern
HOLD
Downgrade
BUY
SRI
StoneRidge
SELL
Downgrade
HOLD
SXE
Stanley
HOLD
Downgrade
BUY
SYNO
Synovis Life
HOLD
Downgrade
BUY
VVUS
Vivus
SELL
Downgrade
HOLD
WFD
Westfield Financial
HOLD
Downgrade
BUY
WGW
Western Goldfields
HOLD
Upgrade
SELL

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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