Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: Minor Changes in Estimates
Prev. Ed.: 2Q13 Earnings Update; May 24, 2013.
Brokers’ Recommendations: Positive: 60.0% (6 firms); Neutral: 40.0% (4); Negative: 0% (0) Prev. Ed.: 4; 4; 0
Brokers’ Target Price: $34.57 ( $1.14 from the last edition; 7 firms) Brokers’ Avg. Expected Return: 8.00%
*Note: Although dated Jul 9, 2013, share price and brokers’ material are as of May 3, 2013.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Tyco International Ltd. (TYC or the Company) designs and manufactures security products, fire protection and detection products, life safety products and services, valves and controls, and other industrial products. Tyco operates in over 60 countries, and is headquartered in Schaffhausen, Switzerland.
Of the 10 firms in the Digest Group covering the stock, 6 firms assigned positive ratings and 4 firms provided neutral ratings. None of the firms were negative on the stock
Bullish (Buy or equivalent outlook) – 6 firms or 60.0% - These firms believe that Tyco caters to an incredibly wide range of needs for businesses and sectors that minimize operating risks. It also boasts leading brand names for products and services under North America Systems Installation & Services, Rest of World Systems Installation & Services, and Global Products. It generates substantial recurring service revenues, which offer attractive visibility and strong cash flow. Increased focus on service offerings, higher investment on new product development, and developing vertical specific solutions provide potential for further growth, going forward.
Cautious (Neutral or equivalent outlook) – 4 firms or 40.0% - The firms believe that the company’s business strategy is based on acquiring companies and making investments that complement its existing businesses. These acquisitions and investments consume significant resources, which could adversely affect its operating results. Hence, the firms remain cautious on the stock.
Jul 9, 2013
Overview
The analysts identified the following factors for evaluating the investment merits of TYC:
Key Positive Arguments / Key Negative Arguments- The Company has a flexible balance sheet and a diversified stream of stable cash flow. It generates significant recurring cash flow from its contract alarm monitoring and fire safety inspection businesses.
- Tyco International’s new corporate structure provides greater transparency to the underlying businesses.
- The Company has a focused management team and it has strengthened its performance post its acquisition of Chemguard and Visonic. The company also divests businesses that are dragging its revenue and do not meet its long- term strategy.
- Tyco International is one of the most globally diversified companies within the industrial group.
- A faster-than-expected macro slowdown in either non-residential construction or energy/water capex cycles can hurt TYC’s growth.
- Projected operational improvements and corporate expense reduction could take longer to materialize. This could lead to reduced profitability and cash flow.
- Tyco International has contingent liabilities related to settlement of prior tax audits and declaration of remaining legal cases.
- Volatile steel spreads can negatively impact growth and profitability at the Electrical and Metal Products businesses.
Tyco International Ltd was formed in Jul 1997, following the acquisition of Tyco International Ltd., a Mass based corporation, by ADT Limited, a public company organized under the laws of Bermuda. Subsequently, ADT Limited changed its name to Tyco International Ltd. On Jun 29, 2007, Tyco International Ltd. completed the spin-offs of Covidien and Tyco Electronics, formerly its Healthcare and Electronics businesses, respectively, into separate publicly traded companies in the form of a distribution to Tyco shareholders. Effective Mar 17, 2009, the company discontinued its existence as a Bermuda corporation, but remained as a Swiss-domiciled entity.
Management office of the company in the United States is located at Princeton, N.J. Effective 4Q12; the company has reorganized its business segments as North America Systems Installation & Services, Rest of World Systems Installation & Services, and Global Products. The Company’s website is
Note: Tyco International’s fiscal year ends on September 30; all calendar references differ from the fiscal year.
Jul 9, 2013
Long-Term Growth
The Company’s top priority continues to be the ongoing investment in its core businesses despite a challenging economy. Management also noted that the Company is well positioned to pursue attractive bolt-on acquisition opportunities. Tyco International’s main cash drivers are organic growth initiatives, productivity projects, acquisitions, and strong shareholders’ returns. The Company remains well positioned in a diverse mix of industries that are highly exposed to construction end markets, ranging from security systems to steel tubes, which have been slowing considerably amid the economic downturn.
Tyco is well placed to leverage the tremendous volume of data on customers’ security systems to help improve their operational performance. This is likely to provide a major opportunity for the company to expand beyond traditional security. This data is also capable of generating actionable business intelligence, from measuring retail activity to locating assets.
The Company is increasing its focus on integrated vertical market solutions to leverage its expertise across comparable customers and provide greater competitive differentiation. It could significantly expand its market presence in several key verticals, such as oil and gas, mining, marine, and retail. The company’s vertical solutions cater to end-customers across the globe having similar requirements.
Tyco International witnessed favorable trends and remains well positioned to capitalize on the convergence of physical security and IT, benefiting from the evolution of integrated security/safety platforms, data/video analytics, and advanced alarm management. The Company will likely benefit from emerging wireless and network services, such as intelligent edge devices, security and fire sensor systems, and remote connected services. In addition, developments in material sciences, such as micro-cell chemical sensors and nano-particles, could offer potential opportunities to expand the Company’s Products business.
Tyco aims to generate predictable revenue streams through its service business and achieve high returns in its early-cycle products business. The new TYC appears to have significant opportunities for cost cut – mostly from centralizing operations and better integrating disparate businesses. Centralizing functions that are currently done in branch offices also offer significant growth potential. Tyco’s split into separate companies is also expected to generate significant revenues, going forward.
Jul 9, 2013
Target Price/Valuation
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest
Rating DistributionNeutral / 40.0% ↓
Positive / 60.0%
Negative / 0.0%
Maximum Target Price / $39.00
Minimum Target Price / $30.00
Avg. Target Price / $34.57
No. of brokers with Target Price/Total no. of brokers / 7/10
Risks to the target price include a decline in Enterprise IT spending impacting customer concentration, loss of customer design wins, storage of IC product shifts to SAS and SATA, inventory builds by customers and foundry dependence to produce chips.
Recent Events
On Jun 19, 2013, Tyco inked an agreement to acquire Exacq Technologies, an open architecture video management systems (VMS) developer of security and surveillance applications, for $150 million in cash.
Revenue
Revenues for 2Q13 increased 3.0% year over year to $2,608 million. Organic revenue grew 2% in the quarter with 7% growth in products, 3% growth in service but a 3% decline in installation revenues.
Provided below is a summary of total revenue as compiled by Zacks Digest:
Total Revenue ($ in million) / 2Q12A / 2012A / 1Q13A / 2Q13A / 3Q13E / 4Q13E / 2013E / 2014EDigest Average / $2,541.9 / $10,403.0 / $2,600.0 / $2,608.0 / $2,685.7 / $2,788.9 / $10,682.6 / $11,291.9
Digest High / $2,542.0 / $10,403.0 / $2,600.0 / $2,608.0 / $2,685.7 / $2,788.9 / $10,682.6 / $11,291.9
Digest Low / $2,541.0 / $10,403.0 / $2,600.0 / $2,608.0 / $2,685.7 / $2,788.9 / $10,682.6 / $11,291.9
Y/Y Growth / 5.4% / -1.5% / 4.9% / 2.6% / 1.2% / 2.2% / 2.7% / 5.7%
Q/Q Growth / 2.6% / 0.0% / -4.7% / 0.3% / 3.0% / 3.8% / 0.0% / 0.0%
Segment Revenue Details:
Effective 4Q12, the company has reorganized its business segments as North America Systems Installation & Services, Rest of World Systems Installation & Services, and Global Products.
North America Systems Installation & Services: This segment designs, sells, installs, services, and monitors electronic security systems and fire detection and suppression systems for commercial, industrial, retail, institutional, and governmental customers in North America.
Revenues for 2Q13 were flat year over year at $953 million (including 2% service growth and 3% year-over-year decline in installation). Backlog in the quarter stood at $2.5 billion, up 2% sequentially, excluding the impact of foreign currency.
Rest of World Systems Installation & Services designs, sells, installs, services, and monitors electronic security systems and fire detection and suppression systems for commercial, industrial, retail, residential, small business, institutional, and governmental customers in the Rest of World regions.
Revenues for 2Q13 increased 1% to $1.1 billion, driven by the acquisitions but offset by a negative impact of foreign currency. Organic revenues were 1% with service up 5% but installation down 4%. Backlog of $2.6 billion increased 5% sequentially, excluding the impact of foreign currency.
Global Products designs, manufactures, and sells fire protection, security, and life safety products, including intrusion security, anti-theft devices, breathing apparatus and access control and video management systems, for commercial, industrial, retail, residential, small business, institutional, and government customers.
Revenues of $578 million increased 11% year over year in 2Q13, driven by acquisitions. Organic revenues were up 7% across all the three product platforms.
Provided below is a summary of segment revenue as compiled by Zacks Digest
SEGMENT REVENUE ( in millions) / 2Q12A / 2012A / 1Q13A / 2Q13A / 3Q13E / 4Q13E / 2013E / 2014ENA Systems Installation & Service / $953.0 / $3,962.0 / $976.0 / $953.0 / $956.1 / $1,002.4 / $3,887.5 / $4,005.5
ROW System Installation & Service / $1,070.0 / $4,341.0 / $1,090.0 / $1,077.0 / $1,126.6 / $1,183.1 / $4,476.7 / $4,759.3
Global Products / $519.5 / $2,100.0 / $534.0 / $578.0 / $603.0 / $603.0 / $2,318.4 / $2,527.1
SEGMENT REVENUE ( in millions) / $2,541.9 / $10,403.0 / $2,600.0 / $2,608.0 / $2,697.4 / $2,685.7 / $10,682.6 / $11,291.9
A graphical representation of the revenue segments is given below:
Outlook
Management expects third-quarter revenue to be around $2.7 billion with 2.7% organic growth. For FY13 it expects revenues to be around $10.6 billion to $10.7 billion.
Firms believe that the Company continues to invest in its businesses to strengthen its long-term competitive capabilities for both products and services. Given the integration of Fire and Security businesses, the Company is uniquely positioned to come up with differentiated solutions for its combined customer base.
Please refer to the Zacks Research Digest spreadsheet on TYC for specific revenue estimates.
Margins
According to the company, operating income in 2Q13 was $123 million versus $228 million in 2Q12.
SEGMENT OPERATING INCOME ( in millions) / 2Q12A / 2012A / 1Q13A / 2Q13A / 3Q13E / 4Q13E / 2013E / 2014ENA Systems Installation & Service - OI - Proforma / $92.0 / $451.0 / $120.0 / $104.0 / $110.0 / $125.3 / $459.3 / $504.8
ROW System Installation & Service - OI - Profoma / $119.0 / $505.0 / $121.0 / $120.0 / $137.4 / $150.3 / $528.7 / $590.4
Global Products - OI - Proforma / $88.0 / $367.9 / $77.0 / $97.0 / $114.6 / $114.6 / $403.2 / $459.7
Corporate & Other - OI - Proforma / ($78.0) / ($331.0) / ($58.0) / ($54.0) / ($60.0) / ($54.0) / ($226.0) / ($226.0)
Operating Income Proforma / $221.0 / $992.8 / $260.0 / $267.0 / $302.0 / $336.2 / $1,165.2 / $1,328.9
Segment Details:
North America Systems Installation & Services
Operating income excluding special items in 2Q13 was $104 million with an operating margin of 10.9%. Operating margin improved 120 basis points year over year on higher mix of service revenues and continued productivity benefits, partially offset by increased synergy costs associated with the separation of the ADT residential security business from the commercial security business, Tyco Integrated Security.
Rest of World Systems Installation
Operating income excluding special items for 2Q13 was $120 million while the operating margin was flat year-over-year at 11.1%.
Global Products
Operating income excluding special items for 2Q13 was $97 million with operating margin of 16.8%.
Please refer to the Zacks Research Digest spreadsheet on TYC for more details on margin estimates.
Earnings per Share
Tyco International reported earnings per share of $0.16 in 2Q13 versus $0.29 in 2Q12. Income from continuing operations stood at $74 million in 2Q13 versus $134 million in 2Q12.
Tax rate for 2Q13 was 17.9%.
Provided below is a summary of EPS as compiled by Zacks Digest:
EPS / 2Q12A / 2012A / 1Q13A / 2Q13A / 3Q13E / 4Q13E / 2013E / 2014EDigest High / $0.30 / $1.35 / $0.40 / $0.42 / $0.48 / $0.54 / $1.85 / $2.15
Digest Low / $0.30 / $1.35 / $0.40 / $0.42 / $0.48 / $0.54 / $1.85 / $2.15
Digest Average / $0.30 / $1.35 / $0.40 / $0.42 / $0.48 / $0.54 / $1.85 / $2.15
Y/Y Growth / 41.4% / 15.0% / 51.6% / 40.0% / 4.6% / 62.8% / 36.9% / 16.2%
Q/Q Growth / 12.6% / 0.0% / 21.2% / 4.0% / 14.7% / 12.5% / 0.0% / 0.0%
Outlook
Highlights from the EPS table are as follows:
- 3Q13 forecasts (1 analyst) forecast an EPS of $0.48.
- 4Q13 forecasts (1 analyst) forecast an EPS of $0.54.
- FY13 forecasts (1 analyst) forecast an EPS of $1.85.
For the third quarter 2013, management expects EPS to be in the range of $0.45 to $0.47. For FY13 management expects EPS before special items to be in the range $1.80 to $1.85.
Tax rate for 3Q13 is expected to be 19%.
Firms believe that the company has a pipeline of attractive acquisitions that complement its existing businesses. These potential acquisitions are in line with the company’s strategy and are expected to provide solid long-term returns to its shareholders.
Please refer to the Zacks Research Digest spreadsheet on TYC for more extensive EPS figures.
StockResearchWiki.com – The Online Stock Research Community
Discover what other investors are saying about Tyco International Ltd (TYC) at:
TYC profile on StockResearchWiki.com
Research Analyst / Nidhi BinaniCopy Editor / Sreela Bose
Content Ed. / Meenu Goyal
QCA / Supriyo Bose
Lead Analyst / Supriyo Bose
No. of brokers reported/Total brokers / 7/10
Reason for Update / Minor Change in Estimates
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