TSC Ratings' Updates: Devon Energy

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

The following ratings changes were generated on Wednesday, July 1.

We've upgraded Devon Energy ( DVN) from sell to hold. Strengths include the company's solid financial position based on a variety of debt and liquidity measures that we have looked at. At the same time, however, we also find weaknesses including deteriorating net income, disappointing return on equity and weak operating cash flow.

Revenue fell by 31.8% since the same quarter a year ago but outperformed the industry average. Earnings per shared declined steeply in the most recent quarter compared with the year-ago period, but the consensus estimate suggests that Devon's two-year trend of declining EPS should reverse in the coming year. Net operating cash flow fell 53.6% to about $1.05 billion compared with the year-ago quarter, underperforming the industry average, and net income fell to about -$3.96 billion from $749 million, underperforming the S&P 500 and the industry average.

Shares are down 54.7%, 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.

We've downgraded Greenhill ( GHL) from buy to hold. Strengths include the company's largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, premium valuation and feeble growth in the company's earnings per share.

Greenhill's debt-to-equity ratio is very low at 0.3 and below the industry average, implying successful management of debt levels. Net operating cash flow increased significantly to -$17.5 million compared with the year-ago quarter, exceeding the industry average cash flow growth rate. Net income fell 27.6% to $13.9 million, underperforming the industry average but outperforming the S&P 500.

Shares are up 34.1% over the past year, exceeding the performance of the broader market during that same time frame. Setting our sights on the months ahead, however, we feel that the stock's sharp appreciation over the last year has driven it to a price level which is now relatively expensive compared to the rest of its industry. The implication is that its reduced upside potential is not good enough to warrant further investment at this time.

We've upgraded Perdigao ( PDA) from sell to hold. Strengths include the company's generally strong cash flow from operations. At the same time, however, we also find weaknesses including deteriorating net income, disappointing return on equity and poor profit margins.Net operating cash flow rose significantly to -$10.4 million compared with the year-ago quarter, though the industry on average experienced a higher rate of growth. Revenue fell 19.8%, and EPS declined steeply. The company has reported a trend of declining earnings per share over the past two years, but the consensus estimate suggests that this trend should reverse in the coming year. Net income fell to -$98.2 million from $29.2 million in the year-ago quarter.

We've upgraded Sport Supply Group ( RBI) from hold to buy, driven by its growth in earnings per share, increase in net income, attractive valuation levels, good cash flow from operations and expanding profit margins. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook.

EPS improved by 8% in the most recent quarter compared with the same quarter last year, and we feel that the company's two-year trend of positive EPS growth should continue. Net income increased by 4% compared with the year-ago quarter, from $3.4 million to $3.5 million. Net operating cash flow rose 108.4% to $5.8 million, outperforming the industry average cash flow growth rate. Sport Supply's 36.5% gross profit margin is strong, though it's decreased from the year-ago period.

We've downgraded Stanley Works ( SWK) from buy to hold. Strengths include the company's expanding profit margins, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, weak operating cash flow and a decline in the stock price during the past year.

The 44.8% gross profit margin is strong and has increased from the same quarter last year. Revenue fell by 14.8% from the year-ago quarter but outperformed the industry average, and EPS decreased by 40%. We anticipate that the company's two-year pattern of declining EPS should continue in the coming year. Net operating cash flow fell 96.7% to $3.6 million compared with the year-ago quarter.

All ratings changes from July 1 are listed below.

Ticker
Company
Current
Change
Previous
ADM.PA
Archer-Daniels-Mdiland
HOLD
Initiated
CDOC
Panda Project
SELL
Initiated
DVN
Devon Energy
HOLD
Upgrade
SELL
GHL
Greenhill
HOLD
Downgrade
BUY
GSLA
GS Financial
HOLD
Upgrade
SELL
HCCI
Heritage-Crystal Clean
HOLD
Upgrade
SELL
IBKC
IberiaBank
HOLD
Downgrade
BUY
PAC
Grupo Aerroportuario del Pacifico
BUY
Upgrade
HOLD
PDA
Perdigao
HOLD
Upgrade
SELL
RBI
Sport Supply Group
BUY
Upgrade
HOLD
SKBI
Skystar Bio-Pharmaceutical
HOLD
Initiated
SWK
Stanley Works
HOLD
Downgrade
BUY

Note: Our quantitative model makes stock recommendations based on GAAP figures that may differ materially from data as reported by the companies themselves. As a result, rating changes are occasionally driven by so-called nonrecurring items. As always, we urge readers to use TSC Ratings' reports in conjunction with additional information to construct their opinions on the value that should be placed on any given stock.

TheStreet.com Ratings, recently cited for Best Stock Selection from October 2007 through February 2009 , is an independent research provider that combines fundamental and technical analysis to offer investors tremendous value in volatile times. To see how your portfolio can use this research, click here now!

More from Investing

Finding Stocks Right for You: Cramer's 'Mad Money' Recap (Friday 8/25/18)

Finding Stocks Right for You: Cramer's 'Mad Money' Recap (Friday 8/25/18)

Bitcoin Today: Prices Continue to Slump Heading Into Weekend

Bitcoin Today: Prices Continue to Slump Heading Into Weekend

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Replay: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

Replay: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

3 Must Reads on the Market From TheStreet's Top Columnists

3 Must Reads on the Market From TheStreet's Top Columnists