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Non-Tech : Tyco International Limited (TYC)

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To: rich evans who wrote (3695)	1/10/2006 3:55:05 PM
From: deeno	Read Replies (1) of 3770

And another one Merrill SOTP Suggests Stock Fairly Valued We have updated our sum-of-the-parts (SOTP) valuation analysis for Tyco based on P/E. Recall that our previous EV/Revenues approach, published 10/18/05, yielded a valuation range that was below $30/share. Our P/E approach yields a valuation range of $35-36 per share before $3-4 per share of negative adjustments for 1) a higher “normalized” tax rate of 30% and 2) a potential class action litigation settlement. While SOTP can often be an “academic” valuation exercise for conglomerates (i.e., the stocks rarely trade on that basis), Tyco’s pursuit of dismantlement would appear to make this approach more relevant, in our view. For our P/E analysis, we derived average peer multiples for each of Tyco's four current reporting segments (excludes Plastics) and weighted these multiples based on each segment's relative contribution to overall company profit. For this analysis, we assume segment profit is a reasonable proxy for each segment’s proportionate earnings contribution to the overall firm EPS – a more precise estimate would requires an allocation of debt and taxes which is not disclosed on a segment basis. Our analysis excludes peers that are currently trading at P/Es that are not meaningful due to weak financial operations (eg, Protection One is not included as a peer multiple but is one of Tyco Security’s largest competitors). Also, we have excluded companies where the relevant peer business is only a small piece of the company’s overall portfolio (eg, home security is <10% of the Brink’s Company’s overall sales mix). Tyco International 10 January 2006 4 Table 1: ML Derived Tyco Sum-of-the-Parts (SOTP) PE Valuation Closing Fiscal C2005E C2006E 2006 vs. 2005E % of TYC 2006E % of TYC Ticker Price Year-End EPS EPS 2005 PE FY05 EBIT PE FY06 EBIT Tyco Electronics Flextronics International FLEX $11.29 Mar $0.68 $0.80 18% 16.5x 14.1x Molex Inc MOLX $26.93 Jun $1.12 $1.32 18% 24.0x 20.4x Amphenol Corp APH $47.41 Dec $2.27 $2.61 15% 20.9x 18.2x Methode Electronics METHA $10.74 Apr $0.61 $0.62 3% 17.7x 17.2x Average 19.8x 31% 17.5x 29% TYCO Fire & Security ML Multi-Industry Coverage Universe 16% 21.0x 18.0x Average 21.0x 20% 18.0x 20% Tyco Healthcare Johnson & Johnson JNJ $62.99 Dec RSTR RSTR NA RSTR RSTR Abbott Laboratories ABT $42.41 Dec $2.50 $2.68 7% 17.0x 15.8x Baxter International Inc BAX $38.84 Dec $1.89 $2.16 14% 20.6x 18.0x Boston Scientific Corp BSX $25.88 Dec RSTR RSTR NA RSTR RSTR Becton Dickinson & Co BDX $62.20 Sep $2.97 $3.28 10% 21.0x 19.0x Average 18.1x 38% 16.7x 40% Tyco Engineeered Products & Services Parker-Hannifin Corp PH $72.26 Jun $4.86 $5.50 13% 14.9x 13.2x Idex Corp IEX $43.40 Dec $2.07 $2.39 15% 21.0x 18.2x Flowserve Corp FLS $42.13 Dec $1.64 $2.03 24% 25.7x 20.8x Watts Water Technologies Inc WTS $31.90 Dec $1.65 $1.95 18% 19.3x 16.4x Crane Co CR $36.71 Dec $2.24 $2.50 12% 16.4x 14.7x Average 19.5x 11% 16.6x 11% Tyco – Current (CY) TYC $31.04 Sep $1.88 $2.06 10% 16.5x 15.1x Peer Average 19.4x 17.2x Tyco EPS (CY) 1.88 2.06 ML Derived Tyco Share Price $36 $35 Source: Company reports, FactSet, Merrill Lynch Research

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