Editor's Note: TheStreet ratings do not represent the views of TheStreet's staff or its contributors. Ratings are established by computer based on metrics for performance (which includes growth, stock performance, efficiency and valuation) and risk (volatility and solvency). Companies with poor cash flow or high debt levels tend to earn lower ratings in our model. NEW YORK ( TheStreet) -- Demand Media (NYSE: DMD) has been downgraded by TheStreet Ratings from hold to sell. Among the areas we feel are negative, one of the most important has been weak operating cash flow.
- EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.
- Net operating cash flow has declined marginally to $26.04 million or 4.36% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Internet Software & Services industry and the overall market, DEMAND MEDIA INC's return on equity significantly trails that of both the industry average and the S&P 500.
- The gross profit margin for DEMAND MEDIA INC is rather high; currently it is at 56.20%. Regardless of DMD's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, DMD's net profit margin of 4.60% is significantly lower than the industry average.
- Compared to where it was a year ago today, the stock is now trading at a higher level, and has traded in line with the S&P 500. We feel that the combination of its price rise over the last year and its current price-to-earnings ratio relative to its industry tend to reduce its upside potential.
- DEMAND MEDIA INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, DEMAND MEDIA INC turned its bottom line around by earning $0.07 versus -$0.23 in the prior year. This year, the market expects an improvement in earnings ($0.40 versus $0.07).
-- Written by a member of TheStreet Ratings Staff