Moody's Cuts Its Rating on Gateway

After raising suspicions about Gateway's (GTW) financial health in January, credit rating agency Moody's cut the computer maker's rating by two notches Tuesday.

Gateway's new rating solidly confirms its junk status, with the company just one downgrade away from what Moody's considers stocks that "lack characteristics of the desirable investment." Gateway was previously just one step below an investment-grade rating.

Not surprisingly, Moody's based its decision on Gateway's current plan to win back market share at all costs. After turning a long-promised profit in the December quarter, Gateway announced early in 2002 that it would abandon profitability for several quarters in an attempt to sell more computers. The company slashed prices to kick off its strategy.

Moody's voiced its doubts about the plan, citing the difficult market for personal computers and Gateway's burdensome cost structure that will ensure losses in the future. The credit rating agency explained that Gateway's financial health is not in jeopardy, but that the new strategy could crimp its cash.

Two weeks ago, Standard & Poor's also cut Gateway's rating, citing similar concerns. S&P's rating also puts the computer maker in a below investment-grade rating.

In the March quarter, Gateway's methods led to a better-than-usual postholiday season unit shipment drop-off of just 5%. At the same time, however, its gross margins took the punishment, falling from 21.2% in the December quarter to 12.6% in the March period.

>To order reprints of this article, click here: Reprints