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Technology ratings stable despite headwinds

Fitch Ratings has published its annual outlook report on the U.S. technology sector. The report gives an overview of technology sub-sectors hardware, IT services, semi-conductors, distributors, electronic manufacturing services, and transaction processors.

Fitch's outlook on the U.S. technology sector is stable for 2013 despite weak revenue expectations.

Fitch believes the U.S. technology sector will experience negative revenue growth in the low single digits in 2013, as a confluence of factors ranging from the U.S. debt ceiling, Europe's debt crisis, and China's government changes has resulted in excess caution from customers. Various factors should serve as mitigants to the weak macroeconomic environment such as the launch of Windows 8 and Windows Server 2012 and continued long-term secular tailwinds related to security, cloud, analytics, tablets, automation, and emerging markets.

The stock prices of some of the largest technology debt issuers plunged in 2012, as long-term growth expectations are being reset downward. HP, Dell, Western Union, and Xerox have experienced significant pressure on their stock prices. While the headline risk for Dell and HP are likely overblown, Fitch does believe the risks related to Western Union as an LBO candidate are viable, as the company's enterprise value to EBITDA has declined to 6.1x. It is questionable whether Western Union's current market capitalization of nearly $8 billion could be financed in this challenging environment.

Fitch believes the majority of the technology sector will be able to withstand a downturn and perform as it did in the 2008-2009 recession (reduce share buybacks, have temporary spikes in leverage, and, for some, benefit from counter-cyclical working capital). However, there are several important factors that make current businesses less flexible than in 2008-2009, including significant secular issues (printing, tablets, new chip technologies), a fiercer hardware competitive landscape, and higher dividend commitments.

Fitch said 2013 is an important year for the industry with the launch of several high-profile products, such as Windows 8, Ultrabooks, and hybrid PC-tablets. This is especially critical for Microsoft, Dell, HP, and Intel, all of which have been limited participants in faster growing products over the last two years. Fitch expects a successful uptake of Windows 8 because of consumer reliance on the Microsoft platform and its extensive enterprise installed base. However, the timing will not be immediate.

The full report titled '2013 Outlook: U.S. Technology' is available on Fitch's web site at '


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