OT - TYC
Or how to make Chanos and Co.'s day!
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anuary 20, 2000
StockHouse News Desk
By Jack J. Bensimon (jbensimon@stockhouse.com)
Nasdaq-100 Columnist
Tyco Building World's Largest Undersea Fiber-Optic Network, Shares Undervalued
As the 'wireless buzz' drives telecommunication stocks higher, the area of building advanced fiber-optic cable
networks is taking on increased prominence. With Internet companies scrambling to develop strategies to
drive additional traffic to their sites, Tyco is positioned to develop the means to transmit enormous amounts of
Internet traffic through an 85,000 kilometer, undersea fiber-optic cable network. Lehman Brothers has a
one-year target of $80.
Toronto, ONT, January 20 /SHfn/ -- As Internet valuations keep skyrocketing to lofty valuations, the convergence of Internet, media,
and cable is a slow, but a gradual trend is taking place. However, within the cable framework of analysis, lies the area of sophisticated
fiber-optic networks, particularly those linking multiple cities in an undersea network. And Tyco International [TYC] has that precise
ability, with a brilliant execution strategy and goliath-type financial strength to compete in the wireless space.
Tyco already is the largest US circuit board maker, seller of security and fire protection systems, and industrial valves. With its new initiative, it will be one of the biggest designers of
undersea fiber-optic cable used to transmit Internet traffic.
Tyco is repurchasing $2 billion worth of stock in an aggressive stock buy-back program. Investors and analysts believe the stock currently around $38 a share, will be buoyed by the
repurchase program.
Despite Tyco's run-ins with investors questioning several accounting related practices used to account for acquisition transactions, Tyco shares have wide institutional ownership (80% are
in institutional hands). Additionally, its strong financial indicators point to favorable near-term stock appreciation for investors seeking companies with top-line growth, a history of consistent
profitability, and enough free available cash flow to provide a sufficient hedge against unanticipated circumstances.
And major institutions are not shying away from the stock. The world's largest mutual fund, Fidelity's Magellan Fund with over $105 billion in assets, ranks
Tyco as one of its top ten holdings. With over 440 stocks in the flagship fund, the top ten represent 27% of the whole portfolio. Fund manager Bob Stansky
has recently indicated that the fund will be increasing its exposure to the technology sector by reducing its cash position from 8% to 3%, with greater
emphasis in companies that have direct business segments in telecommunications. With $105 billion in its arsenal, the Fund has the ability to move markets
by shifting in and out of sectors. As Tyco shares appreciate with strong volume, and an earnings record that no Internet company can come close to
matching, it is likely to be on Magellan's radar screen for purchase, further fuelling the stock.
There are two main factors that could propel the shares to new levels in the near-term.
First, Tyco is building what is considered to be the largest undersea cable fiber-optic network linking key cities such as London, Hong Kong, Tel-Aviv, New York, Tokyo, Seattle, St.
Petersburg, and Los Angeles.
Second, rumors of accounting irregularities are losing credibility as the investment community focuses on underlying fundamentals.
Designing largest undersea cable optic-fiber network linking multiple cities, wave of the future.
Tyco is designing and building what industry experts believe to be the largest and most advanced global undersea telecommunication fiber-optic network. By selling 20% of the interest to
the public via IPO by mid-year, the newly formed Telecom Global Network will have unbridled capacity. The network will have minimum capacity of 2.56 terabits over a fully integrated
system spanning 85,000 undersea kilometers, connecting 25 major telecommunication centers ranging from New York, Tel-Aviv, St. Petersburg, Hong Kong, Tokyo, Seattle, Los Angeles,
London, as well as 15 other major European cities.
Undersea cable is not entirely a new phenomenon to Tyco. As Tyco CEO Dennis Kozlowski explains, "Undersea cable has been a contributor of strong earnings and cash flow to Tyco for
nearly 30 years." As well, the addition of the over 85,000 kilometers of fiber-optic network will provide important synergies to hook-up with major telecom carriers of the world. The undersea
project will set up the company "as an owner and seller of undersea cable bandwidth to the telecom carriers of the world," argues Tyco CEO Dennis Kozlowski.
Suspicions of accounting irregularities losing steam as Wall Street hones in on fundamentals.
Despite the stock being hit over the last month over suspected accounting irregularities with lawsuits being filed by investors, a close examination of the company's underlying fundamentals
and strategy question the credibility of these claims. With recent quarterly earnings increasing by 54% from the previous year coupled with a cash flow treasure chest to the tune of $600
million, serious doubt has been raised about short sellers self-interest in making dubious claims concerning accounting irregularities.
As available free cash flow is a highly reliable estimate of a company's true 'economic' earnings, cash flow figures are not subject to accounting gimmicks, unlike sales, leases, tax
recoveries, profits, and the like. As Bear Stearns & Co. electronics analyst cogently surmises "The organic growth in this company is so good, why would Tyco ever engage in minor
earnings management? Tyco doesn't need to do that stuff." Lehman Brothers' [LEH] analyst Robert Cornell has a one-year price target of $80, considered conservative relative to several
other analyst forecasts.
With a forward P/E of 22 times forecasted 2000 earnings, coupled with a price-to-sales ratio nearly 3 times, the stock has an attractive valuation compared to its sector multiple of a 33 P/E
ratio. These shares represent a play on the broad electronics sector, but more importantly, the integration of its own electronics divisions with telecommunications through undersea
fiber-optic networks.
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