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Favorite Stock: Tyco
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January 15, 2002: 12:07 p.m. ET
A second equity strategist likes conglomerate for cash flow growth.
By Staff Writer Andrew Stein
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NEW YORK (CNN/Money) - While investors are particularly wary of corporate rumors following Enron's collapse, Credit Suisse Asset Management equity strategist Eric Wiegand is "not one to run from controversy," picking conglomerate Tyco International as his favorite stock.
A recent newsletter published by SEC Insight Inc. mentioned a Securities and Exchange Commission probe into the company's accounting practices, which sent a shiver down investors' spine and sent Tyco shares down nearly 7 percent in early January.
Tyco shares rebounded, but rumors lopped another 8.5 percent off the stock last Friday after it was reported the company was interested in acquiring defense contractor Honeywell International (HON: up $0.41 to $32.11, Research, Estimates) or United Technologies (UTX: down $0.14 to $62.10, Research, Estimates).
The company posted a strong fiscal first quarter before the bell Tuesday.
The Pembroke, Bermuda-based company reported an operating profit of 74 cents per share, ahead of the 63 cents per share earned a year earlier, and a penny better than Wall Street's estimates.
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Credit Suisse Asset Managment's Eric Wiegand | |
Tyco (TYC: down $4.30 to $48.10, Research, Estimates) also said first-quarter revenue climbed 25 percent to $10.1 billion compared with $8 billion a year earlier. While the company's closely watched free cash flow came in at negative $215 million in the first quarter, it expects nearly $4 billion in cash flow in fiscal year 2002.
Despite topping expectations, Tyco said it sees a second-quarter operating profit below analysts' estimates.
Click here for another strategists' take on Tyco
Before the accounting and merger speculation started circulating, Salomon Smith Barney's Tobias Levkovich selected Tyco as his favorite stock. Now Wiegand comments on the rumors, and explains why he prefers Tyco shares.
Playing devil's advocate, would an acquisition of Honeywell or United Technologies hurt Tyco?
In recent meetings with representatives of management, when asked about Honeywell, they suggested that some operations may be of interest but that the aggregate was not. They had no desire for aerospace assets. I believe that management has become more sensitive to investor concerns that they need to demonstrate their ability to manage the respective business post acquisition and drive return-on-investment improvement. Recent transactions for cash would support this notion.
Click here to check CNN/Money's report on Tyco's first quarter
As for United Technologies, we are positive on the name and feel that its management has taken steps to improve operating results and the company doesn't fit the profile of a typical Tyco target, especially with loads of aerospace.
Many investors watch the company's free cash flow as a measure of Tyco's operating profits and they reported negative cash flow for the first quarter. Any concerns?
We believe the softness in cash flow was anticipated and is explained by seasonal weakness in their first quarter, as clients reduce working capital into the end of the year, as well as the timing of annual cash bonuses.
Amid the rumors, what draws you to Tyco?
This company, while no stranger to controversy, has continually demonstrated its ability to acquire businesses, drive out costs, improve operating efficiencies and enhance shareholder value. We are particularly attracted to the stock from a valuation perspective.
Tyco currently trades at 14.4 times our (fiscal year ending in) September 2002 estimate of $3.61 (a share) and 12.1 times our September 2003 estimate of $4.27. Each of our estimates is currently below consensus levels. While at very attractive multiples, the company is a strong generator of free cash flow, it anticipates nearly $4 billion this year, and has improved the consistency and quality of its earnings.
Do you have a price target on Tyco shares?
Our price target is in the low to mid $70's, or nearly 17 times our fiscal year 2003 estimates.
As Tyco's accounting has come under fire, do you know who does its accounting?
Our notes show the accountant as PriceWaterhouseCoopers.
Do you have a stake in Tyco?
Tyco shares are broadly owned by our clients and I do have a small position in the shares personally. 
* Disclaimer
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