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Equinix's (EQIX) Rating Bumped Up, Outlook Improved by Moody's

Zacks Equity Research

Equinix, Inc.'s EQIX corporate family rating was recently upgraded to Ba1 by a notch by Moody’s Investors Service, the rating division of Moody’s Corporation MCO. The company’s rating outlook has also been upgraded from stable to positive.   

Further, the company’s senior unsecured debt rating has been improved to Ba1 from Ba2, while the probability of default rating has been upgraded to Ba1-PD from Ba2-PD. Moreover, its speculative grade liquidity (SGL) rating has been reiterated at SGL-2.

Key Rating Drivers

The Ba1 rating reflects Equinix’s position as a leading global provider of carrier-neutral data center and inter-connection services. In fact, taking into account current growth in the retail colocation and inter--connection space, Moody’s anticipates strong financial performance from Equinix.  

The company's contracted recurring revenue model, notable geographic scale and strategic real estate ownership in important communications locations are other positives for the company. Equinix adheres to a balanced debt and equity issuance strategy undertaken to fund its cash flow deficits that arise due to elevated capital spending and steadily-rising dividend payouts. Such prudent capital-management strategy is also encouraging. 

Additionally, amid near-term global tailwinds for data-center services, Equinix is capitalizing on its growth potential by pursuing joint-venture transactions. In fact, recently, the company completed the formation of a partnership with Singapore's sovereign wealth fund, GIC, to develop and operate xScale data centers in Europe. (Read more: Equinix Closes $1B JV Deal With GIC for European Data Centers)

These deals will fortify its balance sheet and further strengthen cash-flow generation.

However, Moody views evolving business models of data-center operators, intense competition and high capital intensity as primary industry concerns. Furthermore, if the company’s acquisitions are primarily debt funded, the same may mar deleveraging efforts.

Notably,Equinix recently entered into an all-cash transaction agreement to acquire three data centers in Mexico. This will extend the company’s reach in large-growth markets and facilitate greater inter-connection within America as well as among international markets. (Read more: Equinix Fortifies Mexico Portfolio With $175M Buyout)

In addition, Moody’s noted that the company’s high dividend disbursements resulted in its negative free cash flow, which is another concern.

Conclusion

This upgraded rating boosts Equinix’s creditworthiness in the market and is likely to enhance investor confidence in the stock. In fact, such moves provide companies an opportunity to enjoy favorable costs on debts and solid access to capital, and are therefore encouraging. 

Over the past six months, shares of this Zacks Rank #3 (Hold) company have gained 27.8%, as compared with the real estate market’s rally of 8%.


Stocks to Consider

Investors can also consider some better-ranked stocks from the REIT space like Extra Space Storage Inc. EXR and EastGroup Properties, Inc. EGP, both carrying a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Extra Space Storage's Zacks Consensus Estimate for the ongoing year’s funds from operations (FFO) per share climbed marginally to $4.87 in a month’s time.

EastGroup Properties' FFO per share estimate for 2019 moved north to $4.93 over the past month.

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Moody's Corporation (MCO) : Free Stock Analysis Report
 
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