Moody's Investor Service downgraded
The ADT Corporation
) speculative-grade liquidity rating by one notch to SGL-2 from
SGL-1. The credit rating agency cited weaker cash balances and
higher borrowings as reasons for the downgrade.
Rationale behind Downgrade
The downgrade of the company's liquidity rating was primarily
attributable to higher borrowings under its revolving credit
facility and a lower covenant cushion. Also, ADT's recent
acquisition of Reliance Protectron, Inc. lowered its cash balances,
further impacting its liquidity. Since Jan 2014, the company has
increased its quarterly dividend by 60% to 20 cents per share, and
is thus employing incremental cash for meeting its dividend payment
The company has strong free cash flow generation prospects and has
access to undrawn balances under its revolving credit facility as
well. However, since its spin-off from diversified conglomerate
Tyco International Ltd. (
) in Sep 2012, the company has introduced new share repurchase
programs and expansion strategies, thus changing its leverage
targets often. The company's volatile financial policy and
aggressive leverage targets create some degree of uncertainty in
its strategic risk levels.
ADT's liquidity ratings could be further downgraded if its debt
levels increase without a corresponding boost in earnings.
Additionally, higher attrition rates or deteriorating liquidity
could impact the ratings negatively as well.
The company's ratings could receive an upgrade if it leans towards
more conservative financial policies and sustains lower debt
ADT is a leading provider of electronic security, interactive
automation, and monitoring services, and is a leader in the
high-potential residential-alarm-monitoring space in North America
with about a 25% market share. The company has displayed strong
focus on growth, complementing organic growth strategies with
ADT's subscription-based business model enables high margins in the
monitoring business. Moreover, the company consistently focuses on
innovation to keep up with the dynamic market environment. This
Zacks Rank #2 (Buy) firm has also partnered with Ford Motor Co. (
) to combine Ford's SYNC technology with its Pulse technology. This
technology will allow users to control the security of their house
using voice commands while on the road.
However, ADT faces increasing competition from non-traditional
security service providers. Some cable and telecom companies are
launching interactive security services that compete with ADT's
offerings. Also, Google Inc. (
) has ventured into this arena by acquiring connected device
company Nest Labs.
The company has aggressive expansion plans for the future as it
leverages its competitive positions and explores new growth
opportunities. Its strategies will likely lead to higher leverage
as well. However, it is too early to predict whether the liquidity
rating downgrade will have a negative impact on investors or
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