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Non-Tech : Tyco International Limited (TYC)
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To: deeno who wrote (3732)5/12/2007 11:07:56 AM
From: rich evans  Read Replies (2) of 3770
 
Tyco's main problem has been the increase in costs for copper and steel and other metals. Between 2005 and 2006 these costs increased 500mill a year and hurt margins by 1%. Now in 2007 tyco is experiencing another 100mill a quarter increase compared to 2006 which is another 1% on gross margins. So tycos gross margins are down to 32.5% and their operating margins down to 12.5% from 14.5% two years ago.

Another negative is the increase in SGA . Even if you take out the separation expenses which are 80=100mill per quarter, tyco SGA percent has gone up to 20 % from 19%.

All these expenses were not supposed to happen as tyco was trying to create operational efficiencies thru their lean manufacturing programs, strategic sourcing programs, and working capital programs and reducing footprints thus raising margins. Instead margins have decreased due to all the SGA overhead and the material costs.

A owner of tyco is betting that material costs will decrease and tyco will lower SGA after separation. Could happen. If not tyco could stay in the 32-35 range overall IMO. I have been sellling calls for incomebased on tyco's low volatility and limited upside.

Tyco is still generating a lot of cash though and a return of old margins plus higher pe after separation puts the stock to $40. Wishful thinking?
Rich
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