Turnarounds That Haven't Turned Around: Tyco International (TYC, TEL, COV)

Tyco International Ltd. (NYSE: TYC) is a hard turnaround to call as one that hasn’t turned around because it has already begun its long-term initiatives to enhance shareholder values.  The problem is that it has been unsuccessful so far.  The company completed the spin-off of Tyco Electronics (NYSE: TEL) and Covidien Ltd. (NYSE: COV) on July 1, 2007.  Because of these spin-offs, Tyco was a much harder stock to cover and to use valuations and historical data on.  In fact, analysts from large brokerages and bulge bracket firms have had a hard time breaking down the de-conglomerized conglomerate.  We also want to caution that many figures used actually vary from source to source and this made analysis not as straightforward here in this case.

First, let’s look at the spin-off companies.  Tyco Electronics (NYSE: TEL) traded at $39.81 on a dividend adjusted basis at the end of July 2 and have fallen down to the mid to low-$30’s before a recent recovery. But even north of $37.00 shares are still down.  Tyco Electronics has a equally mixed coverage spread between Buy/Hold and an average price target of roughly $41.00 from analysts.  Covidien (NYSE: COV), the medical products entity, shares traded at $43.24 on a dividend adjusted basis at the end of July 2 and have traded in mostly in a high-$30’s to mid-$40’s basis since.  With a $44+ handle this one still has a mixed verdict depending upon whom you ask.  Covidien has a mixed opinion from a thin group of analysts and an average price target of roughly $47.50.  It seems that offspring aren’t being thought of as great growth vehicles.

But back to Tyco International Ltd. (NYSE: TYC).  Tyco International shares took a serious hit in late 1999, but they recovered sharply and hit new highs in 2001.  By early 2002 the accounting scandals and the Koz issues came full circle and shares were crushed.  On an adjusted basis the stock lost more than two-thirds of its value.  2003 to the end of 2004 were great years to own shares, but this hasn’t really been the case since then.

Back before these spin-offs were completed, we noted how there appeared to be a phantom premium in Tyco shares just because of the hype around the break-up and because of the craze surrounding private equity and shareholder initiatives.  What appears to have happened is that now the street has given it a more proper valuation or at least a more realistic one, and as we noted not all bad stories have to have sad endings.

On an adjusted basis Tyco International (NYSE:TYC) shares were over $50 at the July 1 date, but they have never been back.  Shares trade around $40 now and have been as low as $38-ish over recent weeks.  If you trust the "average price targets" from analysts, that appears to be around $50.00 from a much smaller group than in prior years.

Just last week a court approved some $3.2 Billion in investor class action law suit settlements over the accounting fraud took the company down.

We do caution against using any solid earnings forecasts because many analysts have not fully adjusted their opinions to reflect the "new" Tyco in a post spin-off world.  First Call has Fiscal September-2008 EPS at $2.61 (a 15.5 forward P/E ratio) and fiscal September-2009 EPS at $3.24 (a 12.5 forward P/E ratio), although we still question some of these since the spin-offs.  If the company can achieve those estimates, then there are few who could argue against this being one of the better value plays out there.

Most of our "turnaround stocks that haven’t turned around" are troubled companies in troubled predicaments that may have a very hard time making a turnaround come to fruition.  But Tyco may be one of the exceptions.  That phantom premium may be in the rear view mirror.  Its value is also now easier to see since the spin-offs have been completed and are basically two quarters on their own.  Who knows, maybe 2008 to 2009 will be Tyco’s time to shine.

Jon C. Ogg
December 28, 2007

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