TSC Ratings' Updates: Chipotle

• ByTSC Ratings,
• On 4:07 pm EDT, Monday April 6, 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 Monday, April 6.

We've upgraded Advent Software from hold to buy, driven by its robust revenue growth, impressive record of earnings per share growth, compelling growth in net income, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value.

Revenue rose by 25.3% since the same quarter a year ago, and EPS improved. The company has demonstrated a pattern of EPS growth over the past year that we think will continue. Net income increased 62.9% compared with the year-ago quarter, from $3.8 million to $6.2 million. Advent's debt-to-equity ratio or 0.1 is below the industry average, implying successful management of debt levels. Its quick ratio of 0.6 displays a potential problem covering short-term cash needs. Advent's gross profit margin of 72.6% is high but has decreased from the same period last year. Its net profit margin of 8.3% is below what it was in the year-ago quarter.

We've upgraded Chipotle Mexican Grill, which engages in the development and operation of fast-casual, fresh Mexican food restaurants, from sell to hold. Strengths include the company's robust revenue growth, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, we also find weaknesses including a generally disappointing performance in the stock itself and poor profit margins.

Revenue rose by 18.8% since the year-ago quarter, though EPS declined. Chipotle's deb-to-equity ratio or 2.5 is low but is above the industry average. Its quick ratio of 2.5 demonstrates the ability to cover short-term liquidity needs. Net operating cash flow rose 15.7% to $47.9 million compared with the year-ago quarter. Chipotle's 21.3% gross profit margin has decreased from the year-ago quarter, and its net profit margin of 4.8% trails the industry average.

Shares have plunged 41.3% over the past year, probably driven by the decline of simila magnitude in the overall market. Don't assume that the stock can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, Chipotle is still more expensive than most of the other companies in its industry.

We've upgraded Lawson Software, which provides enterprise software, from sell to hold. Strengths include the company's increase in net income, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. However, we also find weaknesses including disappointing return on equity, weak operating cash flow and a decline in the stock price during the past year.

EPS have improved in the most recent quarter compared with the year-earlier quarter, and we feel that Lawson's year-long trend of EPS growth should continue. Net income rose 916.1%, from $730,000 in the year-ago quarter to $7.4 million in the most recent quarter. The company's gross profit margin is 56.9%, having increased from the year-ago quarter. Its net profit margin of 4.2% trails the industry average. Net operating cash flow fell 34.7% to $15.9 million compared with the year-ago quarter. Return on equity slightly decreased, implying a minor weakness in the organization.

We've upgraded temperature-sensitive truckload carrier Marten Transport 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, solid stock price performance and notable return on equity. We feel these strengths outweigh the fact that the company shows low profit margins.

EPS improved in the most recent quarter compared with the same quarter last year, and we feel that the company's year-long trend of EPS growth should continue. Net income rose 96.3%, from $3 million in the year-ago quarter to $5.8 million. Marten's debt-to-equity ratio of 0.02 is below the industry average. The 1.1 quick ratio implies the ability to avoid short-term cash problems. Revenue fell 3.1%, but EPS increased.

Shares rose over the past year, outperforming the S&P 500. The stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.

We've downgraded Schweitzer-Mauduit International, which manufactures and sells paper and reconstituted tobacco products to the tobacco industry, from hold to sell. This rating is driven by the company's decline in the stock price during the past year, disappointing return on equity, poor profit margins, weak operating cash flow and feeble growth in its earnings per share.

ROE decreased from the same quarter a year ago, implying a minor weakness. The company's gross profit margin is 21.9%, though it has increased from the year-ago period. Net operating cash flow fell 71.7% to $5.3 million compared with the year-ago quarter. EPS declined, though the consensus estimate suggests that the company's year-long pattern of declining EPS should reverse in the coming year.

Shares tumbled 12.4% over the past year, in par reflecting the market's overall decline. We do not see anything in this company's numbers that would change the one-year trend. It was down over the last 12 months; and it could be down again in the next 12. Naturally, a bull or bear market could sway the movement of this stock.

All ratings changes from April 6 are listed below.

Ticker Company Current Change Previous ADVS Advent Software BUY Upgrade HOLD AEHR AEHR Test Systems SELL Downgrade HOLD CMG.B Chipotle Mexican Grill HOLD Upgrade SELL LWSN Lawson Software HOLD Upgrade SELL MRTN Marten Transport BUY Upgrade HOLD SWM Schweitzer-Mauduit SELL Downgrade HOLD XIN Xinyuan Real Estate HOLD Upgrade SELL SOURCE:

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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