Companies Rated Triple-A

As of 3-11-09, there were 7 companies that enjoyed a AAA credit rating from Moody's based on the company's size, stability and ability to pay back debt. General Electric (GE) was recently stripped of its AAA rating and received a lowered rating of AA+. GE was expecting worse news so the fact that they were also labeled “stable” put some worries of a GE bankruptcy to rest and gave GE’s stock price a boost on the same day its rating was lowered.

Below is a list of the AAA rated companies (excluding Berkshire Hathaway (BRK.A)), their valuation attractiveness, and their Z-scores (likelihood of going bankrupt within the next 2 years) (click on chart to enlarge). Which of the AAA companies may be the next to join GE in getting a rating downgrade? Automatic Data Processing (ADP) has the lowest Z-score (the least amount of financial strength) and is theoretically the most likely company to have its AAA rating lowered.

The Altman Z-score defined: A metric that gives insights into the likelihood of a firm going bankrupt in the next 2 years. The model was developed by Professor Edward I. Altman of the NYU’s Stern School of Business and first published in The Journal of FINANCE in September 1968. A common critique to this metric is that it was developed over 40 years ago and is no longer relevant.

In 2001, Professor Joseph D. Piotroski of The University of Chicago Graduate School of Business, published a paper called, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers. Piotroski showed that value investors were rewarded by looking at a firm’s financial health and he showed that Z-score was a meaningful statistic.

More recently, on December 5, 2008, Dr. Altman was called to testify before a House of Representatives Committee on the condition of U.S. Automakers. In his testimony, he noted that Bloomberg, Inc. reported, “that approximately 1,000 users of their system per day access the Altman Z-Score model.”

The Altman Z-Score breaks down firms into 3 zones:

• >2.99 – Not Likely to go Bankrupt
• 1.8 - 2.99 – Gray Area
• <1.8 – Likely to go Bankrupt in the Next 2 Years

Triple-A Rated Companies Ranked By Z-Score

*AFG’s Value Expectation allows us to understand the imbedded Sales Growth, EBITDA Margins, and Asset Turnovers a company has to deliver in the future to justify its current trading price. In theory and in normal circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued. The table displays the implied future sales growth of companies assuming their EBITDA margins and Asset turnovers stay at the 5 year median levels.

Comments

[Pj568:]

Please use the Altman Z score correctly. The numbers you use are for the public industrials. Altman specifically excludes the financial sector from his ratings. Following Dr. Altman's method for GE, you would first eliminate GECC before computing a score. He has a great system but don't misuse it.

Mar 13 09:15 AM

[Herosi:]

So by this score ADP, at 1.29 is likely to go bankrupt. hmmm..11 percent growth, several hundred million in cash and they just up their dividend I just don't see the math here.

Mar 13 10:23 AM

[zorkfin:]

So ADP is likely to go bankrupt in two years, and has greater problems than GE. You did one thing right, you did not provide your name, which can save you from the embarrassment that predictions like this can do in the future. Nobody will be able to say this is the moron who said ADP will be bankrupt in 2 years.

Mar 13 03:15 PM

[Trane250:]

I thought that it was S&P that just lowered GE's credit rating to AA+, not Moodys.

Mar 14 10:07 AM

[optionsgirl:]

You just illustrated that you can't rely on the Z Score. Because, irrespective of the fact that you would subtract the credit arm of GE to compute, the facts are that the rest of GE are propping up GECC. So, why would you want to subtract the problem area? That would make GE look a lot rosier than it actually is.


On Mar 13 09:15 AM Pj568 wrote:

> Please use the Altman Z score correctly. The numbers you use are
> for the public industrials. Altman specifically excludes the financial
> sector from his ratings. Following Dr. Altman's method for GE, you
> would first eliminate GECC before computing a score. He has a great
> system but don't misuse it.

Mar 14 10:31 AM

[cayoblues:]

Hi...Any particular website you'd recomend about the Altman Z scores, pro or con? Thanks!


On Mar 13 09:15 AM Pj568 wrote:

> Please use the Altman Z score correctly. The numbers you use are
> for the public industrials. Altman specifically excludes the financial
> sector from his ratings. Following Dr. Altman's method for GE, you
> would first eliminate GECC before computing a score. He has a great
> system but don't misuse it.

Mar 14 10:47 AM

[martyg:]

so apple computer is not on the list because it has no debt (zero) and it has over $26 billion in cash. they must be packing the furniture and staring bankruptcy right in the face within 2 years.

Mar 14 03:17 PM

[DaveinHacke...:]

You seem to be confusing the Altman Z-Score with the credit ratings assigned by the rating agencies. If you run the Altman Z-Score Model on Apple, you'll find the model shows it to be in excellent shape financially. Apple doesn't get a triple-A rating from the rating agencies because they only rate companies that issue debt.


On Mar 14 03:17 PM martyg wrote:

> so apple computer is not on the list because it has no debt (zero)
> and it has over $26 billion in cash. they must be packing the furniture
> and staring bankruptcy right in the face within 2 years.

Aug 16 12:17 AM