GameStop Levels Up To Investment Grade
Summary
- Moody’s is overstating GameStop’s credit risk with their cross-over Ba1 credit rating.
- We rate the company two notches higher as lower medium investment grade credit, given their strong cash flows, sizable expected cash build, and strong recovery rate.
- Cash bond markets are grossly overstating GME’s fundamental credit risk with a cash bond YTW of 7.119%, relative to our Intrinsic YTW of 2.879% with an Intrinsic CDS of 167bps.
Cash Flow Profile
Moody’s is overstating the credit risk of GameStop Corp. (NYSE:GME) with its Ba1 rating. Our fundamental analysis highlights a much safer credit profile for GME, whose strong cash flows cover all operating obligations each year. Moreover, their sizable expected cash build would grant them the ability to meet all obligations including debt maturities through 2022. We therefore rate GME two notches higher at an IG4 credit rating, or a Baa2 equivalent using Moody’s ratings scale.
Moreover, cash bond markets are grossly overstating GME’s fundamental credit risk with a cash bond YTW of 7.119%, relative to an Intrinsic YTW of 2.879% with an Intrinsic CDS of 167bps.
We produced a Credit Cash Flow Prime chart for GameStop, as we do for every company we evaluate. The chart provides a far more comprehensive view of credit fundamentals than traditional ratio-based analyses. It shows the cash flow generation and cash obligations related to the credit of the firm, adjusted for non-cash financial statement reporting distortions from GAAP. The blue line indicates the gross cash earnings (Valens’ scrubbed cash flow number) expected to be generated based on consensus analyst estimates and Valens Research’s own in-house research team. The blue dots above that line include the cash available at that time while the blue triangles indicate that same amount plus any existing, available lines of credit.
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