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Tyco stock continues fall
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October 14, 1999: 5:54 p.m. ET
Firm's assurances of no accounting problems fail to reassure market
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - No news was bad news Thursday for Tyco International Ltd., as company assurances that there were no accounting problems at the acquisition-hungry conglomerate did little to assuage fears of investors.
Questions were raised this week about the quality of the earnings of Tyco (TYC) by David Tice, a Dallas portfolio manager and newsletter publisher who makes sell recommendations to institutional investors. Tice's report questioned the billions in special and restructuring charges taken by the company in recent years as its market capitalization rose to about $100 billion from $3 billion.
Tice's report and rumors that it spawned about accounting impropriety were enough to cause an order imbalance and halt in trading in the stock Wednesday afternoon. Thursday morning the company answered back with a 7 a.m. conference call for analysts.
"There's nothing going on," L. Dennis Kozlowski, Tyco's chairman and chief executive, said during the conference call. "This is the same Tyco that exists today as last week."
But when the market opened, the selling continued at a brisk pace. The stock opened Thursday at 98-1/2, up 1-1/2 from Wednesday's close but down almost 5 percent from the 103-3/8 closing price Tuesday. But the stock soon started to tumble, hitting 83 an hour after it opened, before recovering some of that ground. It ended the day Thursday at 88, down 9, or 9.3 percent, on volume of 30 million shares, more than 10 times the average volume.
Positive earnings news on horizon
The sell-off happened even though Kozlowski said the company expects to exceed earnings estimates when it reports fourth-quarter results next week, and that it is completely comfortable with earnings estimates for next year.
First Call's survey of analysts found them expecting 89 cents a share for the most recent quarter and $4.13 a share for fiscal 2000.
Kozlowski said the regular audit of company results is proceeding normally and has found no problems.
"We've enjoyed a perfect reputation here and we're going to keep it that way," he said. "We're outraged by this report. This person never spoke to anybody at the company. We take these allegations seriously."
Critic does not back down
But Tice stood by his criticisms Thursday. While he said that he is not charging there is anything illegal or improper with Tyco's practices under current accounting standards, he believes Wall Street is giving the company too much credit for earnings strength in the face of charges. He said criticisms he had made of similar practices at Sunbeam Corp. (SOC) and Network Associates Inc. (NETA) preceded the fall in those stocks' values.
"Wall Street always stands behind these companies," Tice said on CNNfn Thursday. "They may make a lot more investment banking fees. We do not have any investment banking relationships. We were saying the same thing about Al Dunlap and Sunbeam. People thought we were crazy."
Tyco bulls stand firm
Analysts who were bullish on Tyco remained bullish Thursday. They said they thought the luster would be restored to the stock once earnings are reported last week, and some raised estimates for next fiscal year based on company statements.
"My initial sense is that this is more of a short-term event that will work through pretty quickly," said Harriett Baldwin of Deutsche Banc Alex. Brown, who already had a "strong buy" rating on the stock and raised her estimate for fiscal year 2000 earnings to $4.45 from $4.10 a share. She said she thought the sell-off Thursday was from momentum players in the market who try to get away from stocks under pressure, more than from any short-selling pressure. Her one-year target price for the stock is $161.
While Baldwin says it is important to study a company taking large special charges, she believes Tyco's record on cash flow justifies the current valuations.
"I think to that I say my gut check is to look at free cash flow," she said. "You can't push that around the way you push around earnings."
Kozlowski said the company will report $1.7 billion in cash flow in its fiscal year report next week.
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