SEC Inquiry Clouds Tyco,But Co Retains Analysts' Support
By Christopher C. Williams
NEW YORK (Dow Jones)--Somewhere in Texas, David Tice may be smiling, as the Securities and Exchange Commission begins an informal inquiry into Tyco International Inc.'s (TYC) accounting, but analysts continue to support the acquisitive conglomerate.
One analyst, John Inch of Bear Stearns & Co., even said the inquiry is good news. "This will resolve the full accounting issue once and for all," said Inch, who added there isn't any reason to believe Tyco has engaged in any accounting irregularities.
This has created a "tremendous buying opportunity," declared Harriet Baldwin of Deutsche Bank, who has a strong buy rating on Tyco.
Just when the questions of Tyco's accounting appeared to be dying, Bermuda-based Tyco said the SEC was conducting an informal inquiry into the charges and reserves the company has taken in connection to acquisitions.
Tyco's shares have been under pressure since early October when Tice, a Dallas-based money manager sharply questioned the company's accounting in a report.
Shares of Tyco have fallen 8 1/2 or 23.4% to 27 3/4 on 68 million shares, compared with average daily volume of about 13 million. The stock has traded as low as 22 1/2, a new 52-week low.
Tyco officials have staunchly defended its accounting practices, but that hasn't prevented the company's shares from losing almost half their value on a stock-split-adjusted basis since the Tice report.
Thursday's announcement compounds Tyco's efforts to combat the accounting questions, and the further battering of its stock may restrict its ability to use its stock for acquisitions, although Tyco has said that it won't do pooling deals anymore.
Although she continues to believe the company's accounting is clean, Baldwin, of Deutsche Bank, said the inquiry will put a cloud over the stock and said it should be a range-bound stock until the inquiry passes.
Earlier Thursday when the stock was around 26, Inch said the stock had "reached its absolute base." "It's not a broken company," he said. The recovery in Tyco's shares from earlier weakness seem to support Inch's view.
Inch and Baldwin said, in fact, that Tyco's fundamentals remain strong. "This has no impact on their fundamental ability to meet my earnings outlook," said Baldwin, who's expecting the company to earn $2.23 a share for calendar 2000.
Officials of Tyco aren't immediately available for comment. Tice also isn't immediately available.
Analysts note that Tyco wasn't required to disclose the informal inquiry by the SEC. By doing so, Tyco is acting in the best interest of shareholders, said Inch, of Bear Stearns.
It's also in keeping with the aggressive way Tyco management has tried to counter the concerns and speculation about its accounting. In fact, in announcing the inquiry, Tyco seemed to relish the inquiry and the opportunity to dismiss concerns once and for all with an official approval from the SEC.
Inch noted that the SEC's corporate finance department has looked at Tyco's books before. The SEC's division of enforcement is undertaking the current inquiry. "It's a matter of routine," he said.
Market sources said that if the SEC is indeed investigating Tice, then it's logical for the agency to also look at Tyco's books, as well. Tyco had called for the SEC to investigate Tice and the rumors about Tyco's accounting.
Baldwin of Deutsche Bank said she isn't "horribly surprised" by the inquiry. The analyst also said the SEC inquiry would be a vindication for Tice if Tyco ended up having to restate numbers, which, she said, is highly unlikely.
Tice, whose report in his "Behind the Numbers" publication, torpedoed Tyco's shares in October, said the SEC inquiry is "somewhat vindication" of his view of the company. "Though I feel sorry for the investors who've lost money," he told Dow Jones Newswires.
The money manager, however, stands by his view that Tyco used aggressive accounting. He also said he thinks the stock can go lower. "It will fall to $10 or $15," he predicted. "The company's underlying growth rate is less than what has been forecasted by Wall Street."
Tice said he has been contacted by the SEC but declined to provide details. He also said he would welcome any investigation by the SEC. "We stand by our report," he said, adding that "no one had advance knowledge of our report."
He also pointed out that the report never used the words "accounting irregularities" in questioning the quality of Tyco's earnings.
Tice declined to say whether he was preparing an additional report on Tyco.
J. Brad McGee, senior vice president of Tyco, told Dow Jones Newswires that the company is "absolutely" buying back stock amid Thursday's weakness.
After slumping to 22 1/2 earlier Thursday, Tyco recovered somewhat to close at 28 on the NYSE , falling 23% from Wednesday's close of 36 1/4. Composite volume reached almost 115 million shares. On the NYSE, volume was 89.8 million shares, the fifth highest daily trading volume.
McGee said the inquiry into the company's accounting "doesn't fundamentally change Tyco." He added that the first quarter, which ends this month, is "shaping up very well" for the company and management remains comfortable with analysts' consensus projection of 45 cents a share.
"We will continue to operate the business as we've done in the past," he said. "There's a lot of organic growth from the business," and the company is looking at generating free cash flow of more than $3.3 billion for the year.
He also said the inquiry shouldn't be much of a distraction to management, calling it "more of a Xeroxing exercise." The information Tyco will supply to the SEC has already been reviewed by the company's auditors, he said.
Tyco, according to McGee, has been undergone four full SEC reviews since 1997 by the division of corporation finance, which didn't find any accounting irregularities.
This, however, is the first time the division of enforcement has looked at Tyco, he said.
The enforcement division, according to Kathleen Hamm, assistant director in that division, looks for potential violations of securities law. The division of corporation finance reviews company's filing.
McGee said he isn't surprised by the SEC inquiry, given the company's significant loss of market share. He also noted that Tyco did call for the SEC to investigate Tice and the accounting rumors swirling around the company.
"Now that we know they are conducting an informal inquiry, our hope is we will have the opportunity to get a clean bill of health from the SEC," McGee said.
He said he doesn't know when it could end. He also said the SEC isn't looking at any particular acquisition.
- By Christopher C. Williams; 201-938-5219
christopher.williams@dowjones.com. |
