Markets & Finance

Giving Credit Where It's Due

Posted on January 23, 2003

By Michael Kaye One nasty side effect of the lackluster economy: Earnings pressure is hampering the credit quality of many U.S. companies, according to a recent report from S&P's global fixed-income research group. The sluggish growth environment has depressed corporate cash flow, constraining the ability of companies to reduce their indebtedness, according to Standard & Poor's.

Ratings agencies such as S&P evaluate a variety of financial performance measures -- including changes in earnings and cash flow, debt levels, and margins -- as well as a company's competitive position and industry trends, to come up with a credit rating.. Of late, the picture hasn't been too encouraging. With 37% of U.S. nonfinancial companies having either a negative outlook from S&P (meaning the rating may be lowered over the next two years to three years) or on its watch list with negative implications (meaning S&P continues to monitor the companies' credit standing), vs. 35% one year ago, the rating agency says that credit-rating downgrades will continue to outstrip upgrades.

In today's uncertain economy, it might be comforting for investors to find companies that have actually seen improvement in their credit ratings -- and by implication, their financial strength. That's the thought behind this week's screen.

We set out to look for companies that have had their credit ratings upgraded by S&P in the last 12 months. Admittedly, it wasn't a very large list. We then looked to the equity analysis side of S&P to narrow the field to those names that also carry S&P STARS rankings of 4 STARS (accumulate) or 5 STARS (buy). Those designations mean that S&P equity analysts expect them to outperform the overall market over the next 6 to 12 months.

The following 14 stocks made the cut.

Company Name/ Ticker

STARS Ranking

Amgen (AMGN)

5

Anthem (ATH)

4

Biovail (BVF)

4

Ensco International (ESV)

4

Fidelity National (FNF)