TSC Ratings' Updates: VMware

• ByTSC Ratings,
• On 11:18 am EDT, Wednesday July 1, 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.

The following ratings changes were generated on Tuesday, June 30.

We've downgraded AirMedia Group from hold to sell, driven by its unimpressive growth in net income, poor profit margins, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.

Net income fell to -$1.25 million in the most recent quarter from $7.28 million in the same quarter last year, underperforming the media industry average. The 18.4% gross profit margin has decreased significantly from the year-ago period, and the 3.9% net profit margin is below the industry average. AirMedia has experienced a steep decline in earnings per share compared with the year-ago quarter, and we feel it is likely to report a decline in earnings in the coming year. The company has no debt to speak of and maintains a quick ratio of 7.7, demonstrating its ability to cover short-term cash needs.

Stocks have tumbled 54.5% over the past year, underperforming the S&P 500, though 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 Dominion Resources from hold to buy, driven by its revenue growth, good cash flow from operations and notable return on equity. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself.

Revenue increased by 8.9% since the same quarter last year, though EPS declined. We do anticipate the company's yearlong trend of declining earnings to reverse in the coming year. Net operating cash flow rose 168.1% to $1.5 billion compared with the year-ago quarter, outperforming the industry average cash flow growth rate of 69.3%. Net income fell by 63.7% to $248 million, and return on equity also greatly decreased, a signal of major weakness within the corporation. On the basis of ROE, however, Dominion outperforms the industry average and the S&P 500.

We've upgraded SAIC from hold to buy, driven by its revenue growth, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, good cash flow from operations and growth in earnings per share. We feel these strengths outweigh the fact that the company shows low profit margins.

Revenue rose by 11.9% since the same quarter a year ago, and EPS improved by 16%. The company has demonstrated a two-year pattern of positive EPS growth that we feel should continue. Net income rose 12.6% to $116 million compared with the year-ago quarter, outperforming the S&P 500 and the IT services industry. SAIC's debt-to-equity ratio of 0.5 is low and below the industry average, implying successful management of debt levels. Its 1.65 quick ratio demonstrates the company's ability to cover short-term liquidity needs.

We've upgraded Tibco Software from hold to buy, driven by its impressive record of earnings per share growth, compelling growth in net income, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook.

Tibco reported significant EPS improvement in the most recent quarter compared with the same quarter last year, and we feel that the company's pattern of positive EPS growth over the past year should continue. Net income increased by 188.5% since the year-ago quarter, to $10.1 million. Tibco's debt-to-equity ratio of 0.06 is very low and below the industry average, implying very successful management of debt levels. It's 1.7 quick ratio demonstrates its ability to cover short-term liquidity needs. Net operating cash flow increased by 31.7% to $42.3 million compared with the year-ago quarter, vastly surpassing the industry average cash flow growth rate of -18.8%.

We've downgraded VMware from hold to sell, driven by its generally disappointing historical performance in the stock itself and premium valuation.

VMware's 90.5% gross profit margin is very high, having increased from the year-ago quarter, and its net profit margin of 14.9% trails the industry average. Net operating cash flow increased by 94.7% to $259.2 million, outperforming the industry average cash flow growth rate. VMware's debt-to-equity ratio of 0.2 is very low, though it's above the industry average. Its 2.8 quick ratio demonstrates an ability to cover short-term cash needs.

Share's are down 44.7% over the past year, underperforming the S&P 500, but do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, VMware is still more expensive than most of the other companies in its industry.

All ratings changes from June 30 are listed below.

Company (TICKER) Current Change Prev AirMedia Group(AMCN) SELL Downgrade HOLD Ark Restaurants(ARKR) HOLD Upgrade SELL Bridgeline Software(BLSW) SELL Downgrade HOLD China Infrastructure Investment(CIIC) SELL Initiated Citizens First Bancorp(CTZN) SELL Downgrade BUY Dominion Resources(D) BUY Upgrade HOLD Endurance Specialty Holdings(ENH) BUY Upgrade HOLD Entrust(ENTU) HOLD Upgrade SELL eRoomSystem Technologies(ERMS) SELL Downgrade HOLD Federal-Mogul(FDML) SELL Downgrade HOLD Hill International( HIL) HOLD Upgrade SELL SAIC (SAI) BUY Upgrade HOLD Tibco Software( TIBX) BUY Upgrade HOLD VMware(VMW) SELL Downgrade HOLD

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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