TSC Ratings' Updates: Exide Technologies

• ByTSC Ratings,
• On 5:01 pm EDT, Wednesday June 17, 2009

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.

We've upgraded CSX from hold to buy, driven by its attractive valuation levels and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow.

Return on equity has improved slightly compared with the same quarter last year, which can be construed as a modest strength in the organization. Revenue fell 17.2%, and EPS decreased by 27.1%. The company has reported somewhat volatile earnings lately, and we feel it is likely to report an earnings decline in the coming year. Net income decreased by 29.9% compared with the year-ago quarter, falling from $351 million to $246 million, outperforming the S&P 500 but underperforming the road and rail industry average.

We've upgraded Flanders from sell to hold. Strengths include the company's impressive record of earnings per share growth, largely solid financial position with reasonable debt levels by most measures and relatively strong performance when compared with the S&P 500 during the past year. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and poor profit margins.

Flanders reported significant EPS improvement in the most recent quarter compared with the same quarter a year ago, and we feel that the company's yearlong pattern of EPS growth should continue. The 0.4 debt-to-equity ratio is low and below the industry average, implying successful management of debt levels. The 1.1 quick ratio illustrates an ability to avoid short-term cash problems. Revenue fell 2.4% compared with the same quarter last year, though EPS increased. Flanders' gross profit margin of 20.6% is low but has increased from the same period last year, and its 3.7% net profit margin compared favorably with the industry average. Net operating cash flow fell 50.5% to $1.8 million.

We've downgraded Exide Technologies from hold to sell, driven by its disappointing return on equity, weak operating cash flow, generally weak debt management, poor profit margins and generally disappointing historical performance in the stock itself.

Return on equity decreased compared with the year-ago quarter, underperforming both the S&P 500 and the industry average. Net operating cash flow fell to $40,000. The debt-to-equity ratio of 2 is above the industry average, implying poor debt-level management within the company, but the quick ratio of 1 is somewhat strong and demonstrates an ability to handle short-term liquidity needs. Exide's 21.8% gross profit margin increased from the same period last year.

Shares are down 75.1% over the past year, underperforming the S&P 500. Turning toward the future, 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 upgraded Horsehead Holding from sell to hold. Strengths include the company's notable return on equity, reasonable valuation levels and largely solid financial position with reasonable debt levels by most measures. 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.

On the basis of return on equity, Horsehead outperforms both the metals and mining industry average and the S&P 500. Revenue fell 65.2% since the year-ago quarter, and EPS decreased as well. Net income fell from $9.9 million in the year-ago quarter to -$14.8 million, underperforming the industry average but outperforming the S&P 500. Net operating cash flow fell to -$10.1 million.

All ratings changes from June 17 are listed below.

Company Current Change Previous CSX (CSX) BUY Upgrade HOLD Flanders (FLDR) HOLD Upgrade SELL Rand Capital (RAND) HOLD Downgrade BUY Exide Technologies (XIDE) SELL Downgrade HOLD Horeshead Holding (ZINC) HOLD Upgrade SELL

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.

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