RadioShack Cut to Junk at Moody’s

Moody’s has downgraded the Debt Rating of RadioShck from Baa3 to Ba1 and taken its short-term rating to "NOT PRIME" from a "PRIME3" rating.  Debt rating downgrades do not often impact equity holders per se, but this one will drive borrowing costs higher now that the electronics retailer is considered "junk status" by Moody’s.  That bars many corporate bond managers from being able to own the bonds.  The downgrade is reflecting the company’s inability to overcome recent sales and operating performance measurements.

Back on February 28 one of our contributors, Chad Brand of Peridot, wrote that the turnaround in the name was underway.  This is interesting that Moody’s would take this action now since turnaround-CEO Julian Day has taken the stock from under $15.00 to more than $26.00 since last summer.  RSH stock has also been doing well in what has not been a good market for the last two weeks.  Goldman Sachs raised this stock from a Neutral to a Buy on January 30.

When you see these it makes you wonder.  The stock has climbed to new "recent" highs and has come within striking distance of two-year highs.  Moody’s is not on the same wavelength as the equity investors so one must wonder which will end up being wrong.  Either Moody’s is just looking at the stock chart and deciding that the fundamentals won’t be strong enough to propel it further from here after such a large run, or the equity crowd is just ignoring the independent analysis. 

Keep in mind that "bond ratings" are much different than equity ratings and the rationale behind debt rating changes is far different than for the equities.  Equity traders often pay attention to the debt rating agencies because there is often "knowledge envy" and a perceived independence of any conflict of interest more so than from traditional Wall Street analysts. 

RSH shares are still up 1.4% ay $26.35 for the day and this would be another 52-week high for the stock if it closes up here.  This used to trade north of $30.00 5-years ago.

Jon C. Ogg
March 12, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.