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Value Line assigns Financial Strength ratings across a spectrum from A++ (Highest) to C (Lowest). Generally speaking, the largest companies with the strongest balance sheets get the highest scores. Factors considered in making a rating determination include balance sheet strength, as well as earnings performance, market capitalization, stability of returns, and business outlook, among others.

The Financial Strength rating and a stock’s Price Stability rank are the two main components used to determine Value Line’s proprietary Safety Rank, which measures the total risk of a stock relative to the approximately 1,700 other stocks under Value Line review.

Although a company’s Financial Strength rating is just one factor among many that investors should consider, it is an important one. Moreover, shareholders should take particular note of changes in this rating—both up and down. Value Line subscribers have access to our complete list of Financial Strength upgrades and downgrades each week in theSelection & Opinion section of The Value Line Investment Survey. Noted here, however, are recent upgrades awarded to Expedia, Inc.(EXPE) and Mentor Graphics (MENT).

Expedia, Inc.

Expedia, Inc. is a leading online travel service company, providing products and services to business and leisure travelers, as well as retail travel agents. Some of its well-known brands are Classic Vacations, Egencia, Hotwire.com, and Hotels.com. The company spun off TripAdvisor, a popular travel website, in 2011.

Despite healthy revenue trends, it seems that 2013 share net will be close to 10% lower than last year’s figure. That should be attributable, in large part, to the substantial profit declines experienced by the company during the first two quarters, reflecting ramped-up marketing expenses. But assuming a moderation of those costs and generally favorable business conditions, the bottom line stands to bounce back by about 16% in 2014. 

We are upbeat about the company’s prospects over the next three to five years. That’s partially because Expedia maintains a solid position in the United States travel market. What’s more, there have been initiatives directed toward expanding its promising overseas operations. To that end, the company recently acquired a 61.6% stake in German metasearch firm trivago for $564 million. Finally, management remains committed to its investments in technology and infrastructure, thanks to a healthy balance sheet, which should help to support the company’s performance going forward. All told, our projections show healthy advances in both revenues and earnings during the 2016-2018 horizon.

Mentor Graphics

Mentor Graphics provides software and hardware design solutions that enable customers to develop better electronic products faster and more cost effectively. Products and services are marketed around the globe, especially to large companies in such key industries as communications, consumer electronics, semiconductor, and transportation. Foreign units accounted for about 56% of fiscal 2012 sales.

The company’s emulation products are in high demand of late. Indeed, full-chip functional verification of leading edge 28-, 20-, and 14-nanometer designs increasingly demand this technology to reduce product development times and improve quality. This should help to boost Mentor’s profitability, due to emulation’s higher-margin profile. But it is important to mention that emulation takes some time to deliver. In fact, because it is hardware, and not software, it can take up to six months to procure, manufacture, and distribute to customers. 

Solid bottom line increases appear to be in the store for the company both this year and 2014. Emulation demand will probably remain strong. Moreover, recent acquisitions should help Mentor’s position in the automotive sector, which has been experiencing rapid growth. As a result, we believe that share net will climb around 15% in 2013. Assuming further expansion of operating margins, the bottom line might well advance at a similar rate next year.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.