From the street.com "A Sign of the Top, or a Sign of the Times?"
By Aaron L. Task
Senior Writer
12/9/99 9:03 PM ET
"Tough Love"
"Speaking of the strange, wacky and oft-profane times in which we
live, Tyco International (TYC:NYSE) settled down 22.1% to 28
1/4 today. Over 115 million shares traded, making it the heaviest
action for a single stock in NYSE history. As you've doubtless
already heard, the Securities & Exchange Commission has
begun an informal inquiry into the firm's accounting practices.
Tyco officials reiterated their belief in the firm's accounting, as
reported by TheStreet.com/NYTimes.com joint newsroom.
Meanwhile, several sell-side analysts reissued positive comments
about Tyco, much as they did back on Nov. 11, when the stock
closed at 43 1/4.
Today, Merrill Lynch reiterated its long-term buy rating and Bear
Stearns reiterated its buy rating and $65 target. Salomon Smith
Barney reiterated its buy recommendation but lowered its
12-month price target to $50 from $65.
All three firms have investment-banking relationships with the
company.
Given my proclivity for facetiousness, it'd be easy to say the
analysts are simply sticking by the old mantra that if you like Tyco at
43 1/4 (much less at higher levels) you've got to love it at 27 15/16.
But that, I fear, oversimplifies things.
James Samuels, managing director at Banc of America
Securities, which has done underwriting for Tyco, acknowledged
in a research report the SEC inquiry is "materially different" than an
individual raising concerns.
While many peers lauded Tyco for disclosing the SEC action --
something it was not compelled to do -- "the SEC, because it's a
public watchdog, may [now] be forced to find something wrong,"
Samuels said in a phone interview. Because of the subjective
nature of accounting rules, the analyst is confident the SEC could
find something awry in Tyco's books if it wants to.
So here is an analyst who doesn't have his head in the sand (or
where the sun doesn't shine). Yet, Samuels maintained the strong
buy rating that's been intact since long before David Tice's report
first sent the stock careening in mid-October.
"Even if the company is found completely guilty, there still remains
some intrinsic value," he said in defense of that stance, estimating
Tyco is currently trading at a 30% discount to its breakup value.
"And if the inquiry doesn't turn up anything material, the stock will go
back up considerably higher."
Portfolio managers' unwillingness to hold downtrodden stocks at
year-end is an "additional pressure," he noted, forecasting Tyco will
"find a reasonable floor" in the mid-20s and rally come January.
Maybe so. But how does that justify riding the stock all the way
down?
Samuels and other sell-siders characterized the SEC investigation
as not unexpected (although I'm sure Tyco shareholders would have
appreciated a heads-up) and he tacitly admitted they perhaps
overlooked the risk. But given the company's "growth rate, quality of
management and earnings projections," he felt the stock was
extremely attractive when it first came down in the aftermath of
Tice's report.
And if he liked it then...
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