Visit IDEAadvisor
--------------------------------------------------------------------------------
Tyco Cautious Going Forward -- 12:00 PM EST
by Fanting Yu
Tyco International [TYC: NYSE] surprised the Street by issuing, early Tuesday, with a warning on its Q2 earnings, pointing to continued weakness in its Electronics business. The company did, however, manage to top Q1 estimates and reiterate its full-2002 expectations -- which is in line with its previous expectations for performance weighted toward the second half of the year. We continue to believe that Tyco is among the best positioned to bounce back when the economy improves later this year, and with shares now down more than 9% at midday, we reiterate our Buy rating, based on Tyco's favorable valuation.
Visibility for the electronics market remains low, and Tyco expects Q2 earnings to reflect the weakness. It now sees a profit of $0.80-$0.82 per share, below the expected $0.86 per share. Keep in mind that the firm is traditionally cautious in its earnings forecast (it has managed to top earnings estimates five out of the last five quarters) and that final results could be above its estimated range.
We had noted in our preview that there will be no near-term recovery for the Electronics division, but had not expected it erode as much as it did this quarter. Sales declined 24%, wider than the 20% expected by Tyco. Total sales, however, only fell by 4%, thanks to the growing demand for products in the firm's other business units.
In its latest reported quarter, Tyco earned $0.74 per share, up from last year's $0.57 per share and a penny better than expectations. We had foreseen a slight Q1 upside on the strength of the firm's Healthcare and Fire & Safety divisions, and these units did not disappoint.
Healthcare sales gained almost 9%, while Fire & Security sales jumped 19%. The improved sales allowed Tyco to report total revenues of $10.07bn, above consensus estimates of $9.98bn, and 25% higher than prior-year levels. Total operating margins remained flat at 21%, which is impressive given the current recessionary environment.
Looking forward, management said that the company has set the stage for additional growth when the economy recovers - expected by Tyco to be in the 2H:02. Rising demand in Heathcare and Fire & Safety should also allow the firm to meet its own 2002 earnings guidance of $3.70 per share. Consensus is currently looking for $3.67 per share. Tyco also expects free cash flow to grow to about $800m-$1bn in Q2, and to $4bn for the year.
Despite the Q2 warning, the stock's valuation remains favorable - especially as it is being heavily sold at Tuesday's mid-session. We believe the selling to be overdone, and that Tyco continues to be among the best valued of the diversified industrials -- with a P/E ratio of just 12.8 (based on FY:02 estimates) it is significantly lower than its top rivals General Electric's [GE: NYSE] P/E of 25 and 3M's [: NYSE] P/E of 24.
Market Timing From the Technical Desk
On Nov. 15, we said: " Tyco International [TYC: NYSE] has been trading sideways for the last sixteen months. Currently, it is challenging strong resistance in the $56-$58 area. We look for it to retreat from the resistance to $51.62 in two to four weeks."
Tyco did retreat to $51.62, only after a second test of resistance at $56-$58. Further weakness will bring prices down to support at $46.50. It is trading at $49.12.
Risk Tolerance ****(* Low risk, *****High risk) |
