>>When does The Street begin to realize that the 'rebound' will be at best a weak one?<<
Merrill beating the drum for TYC:
Tyco International (TYC $47.95; A-1-1-7)
Volatility Risk: Low
01A $3.05; 02E $3.70; 03E $4.40
• The market has pushed Tyco’s stock down almost 19% YTD.
• The shares now trade at 13.3x our old GAAP CY02E EPS of $3.60. We are aware of no
other large industrial companies that has a P/E this low. Due to concerns about the
recession in the electronics industry, investors may be discounting a lower estimate.
• If Tyco’s FY02 $3.70 EPS estimate were reduced by 10% to $3.33, then the shares
would still only trade at a relatively low 14.4x FY02 EPS.
• Recognizing that the economy remains in a recession and assuming no further
weakening in Electronics beyond current expectations, we remain highly confident of
Tyco’s ability to achieve strong EPS growth of 21% to $3.70 in FY02.
• We are expecting, at least 17%, 1H02 EPS growth and a heavier weighting of EPS into
the 2H02 because of easier comparisons, favorable seasonality late in the year, further
improvement in Tyco Capital and the benefits of the restructuring in Electronics.
• Bear in mind that very few companies are expected to have any growth to minimal
EPS gains in 2002, yet some of them trade at significantly higher P/E multiple.
• In our opinion, fundamentals, outside of Tyco Electronics, are very healthy.
• Tyco Capital’s margins are up because of the elimination of $6B in problem assets
from CIT’s failed purchase of Newcourt, a 16% reduction in the headcount from 7,500 to
6,300, which aided in the achievement of $150M in lower costs, and the benefit from
lower interest rates, which has not yet totally shown up in earnings yet.
• Due to company’s focus on being the low cost provider, Tyco is employing
digitization wherever possible. For example, a consumer can design a home security
system on line.
• We estimate free cash flow of at least $4B in FY02 -- up 60% from FY01. This would
be a strong showing.
• In our view, Tyco shares have significant upside potential.
(P. Young) |
