Moody’s Investors Service Inc is worried. Worried about the leading players in the personal computer business. The New York ratings agency has issued a sector report highlighting its overall negative credit outlook for the personal computer industry. It cites the industry’s razor-thin operating margins, brutal price-cutting, and high degree of business risk caused by strong competition, rapid product obsolescence, and low barriers to entry. Due to the industry’s extreme earnings volatility and the questionable stability of asset values, Moody’s believes that the top tier personal computer companies will retain their credit profile only if they maintain very small amounts of debt in their capital structures – in other words, you can keep your solid credit rating only if you don’t actually try to use it to borrow money. Companies with a diversified operating base, Moody’s goes on, such as Hewlett-Packard Co and IBM Corp, that do not rely solely on personal computers can support more debt than pure play personal computer companies, and generally will have a more stable rating outlook overall because of their diversified revenue base. No rating of a pure play personal computer company should be considered stable beyond a 12 to 18 month time horizon, at best, reckons Craig Fitt, Moody’s analyst and author of the report. Missing a product generation because of misjudging market demand can have disastrous and immediate consequences to an issuer’s liquidity and capital structure, he says. Such companies that appear invincible today can have their credit profile radically changed in a matter of 12 months, the report says – and we have seen the likes of Apple Computer Inc and Dell Computer Corp go from darling to demon in months. Ratings of diversified companies tend to be higher, averaging in the upper-medium investment grade, compared with those of the pure plays, which tend to be rated below investment grade. The ratings agency expects gross margins to further decline across the industry, as participants seek to build market share by cutting prices.
