On Nov 21, we reaffirmed our Neutral recommendation on security and protection services provider Tyco International Ltd. (TYC). While the company’s long-term fundamentals appear solid, we prefer to remain on the sidelines due to its soft top- and bottom-line performances in the recent quarter.
Tyco reported strong fourth quarter fiscal 2013 results as both revenues and earnings increased year over year. The year-over-year rebound to earnings was driven by accelerated growth in service and products along with increased benefits of productivity initiatives. However, unfavorable foreign currency translation, pending lawsuits and high operating expense remain concerns for the company.
Why Reiterated
Tyco serves a wide range of clients including businesses and governments, educational and medical institutions, and commercial industries ranging from food to automobiles. It also boasts leading brand names for products and services under all its operating segments.
The company’s acquisition pipeline is attractive and complements its existing businesses. The acquisitions are in line with the company’s strategy and are likely to provide solid long-term returns to its shareholders. Additionally, the company strengthened its service platform with strategic purchases and accelerated growth rate in high-growth markets.
In the last reported quarter, Tyco reported GAAP income from continuing operations of $162 million or 34 cents per share, a significant improvement from loss of $629 million or $1.36 per share incurred in the year-ago quarter.
However, the company expects corporate expense to be approximately $225 million to $230 million in 2014. Going forward, these are expected to increase due to the timing of certain expenses and valuations. Moving ahead, higher expenses could be a headwind for the profitability of the company.
Over the last 30 days, the Zacks Consensus Estimate for 2014 earnings per share stayed constant at $2.14. For 2015, it increased by 0.8% to $2.58 per share.
Other Stocks to Consider
Tyco holds a Zacks Rank #2 (Buy). Other stocks that look promising and are worth a look now include Hutchison Whampoa Limited (HUWHY), ITT Corporation (ITT) and Navigant Consulting Inc (NCI), each having a Zacks Rank #2 (Buy).
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