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Tyco is no Enron
The businesses are real -- and so is the cash flow.
June 12, 2002: 8:06 PM EDT
By Adam Lashinsky, CNN/Money Contributing Columnist

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PALO ALTO, Calif. (CNN/Money) - There's no question that Tyco is a scary stock -- especially for the average investor.

Speculators, on the other hand, have every reason to sit up straight and take notice when a value guru like Bill Miller pounds the table. The Legg Mason fund manager told reporters Tuesday that he's still aggressively buying the stock, down more than 80 percent this year (for more on Miller's comments, click here).

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The most salient point about Tyco -- and it's been made here before -- is that it's full of real businesses. Fire and security products account for nearly $14 billion in annual revenues. Electronic components are an $11 billion business. Healthcare is another $10 billion business. And CIT, the financial services unit Tyco is trying to unload, had 2001 sales of just over $6.2 billion.

So that's about $40 billion in revenues. The market gives Tyco a market capitalization of about $19 billion. The fear has been that Tyco won't be able to meet its debt payments, in part because of roadblocks to the CIT spinoff or sale.

That fear was somewhat allayed Wednesday evening when Tyco filed an amended registration statement moving it one step closer to an IPO of the unit. It is hoped that the IPO would raise close to $6 billion, and the stock was surging in after-hours trading.

But even if that jump holds, the valuation (at say $10 or $11 a share) assumes there's far more materially nasty stuff that needs to be uncovered at Tyco, as opposed to more instances of personal stupidity like the former CEO's alleged tax-evasion scheme and more incidences of self-dealing by top executives.

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Lessons from Tyco

"Tyco has real products and tangible assets, as opposed to a service or trading company, but even a strong castle is an unpleasant place to be during a siege of varying intensity and unknown duration," writes Legg Mason brokerage analyst Barry Bannister in a recent note to clients.

Bannister's sum-of-parts analysis on Tyco -- using conservative multiples and assuming less cash flow than the company has projected -- yields a value of $25 a share. Of course, he hasn't a clue when market conditions could allow Tyco to trade at what he thinks it's worth.

Tyco is a lot of things, but its businesses aren't a mirage (like some of Enron's). The company didn't invent a market for valves and then create wishful revenues based on them. The risk takers among us might act on that observation. The prudent investors should pull up a chair and watch.

Its and bits ...

Material Sciences This is an exceedingly small ($190 million market cap), exceedingly mundane company I used to follow in the Chicago area -- and it pulled off the incredible feat of hitting a new high every day last week.

Material Sciences (MSC: Research, Estimates), whose stock has traded in a split-adjusted range of $10 to $20 for about a decade, makes treated materials, like laminates. One of its end markets is disk drives, one of the least exciting sub-sectors in Silicon Valley.

Interestingly, the quiet Midwestern company has attracted large chunks of money from several big and arguably savvy mutual fund complexes. According to its recently released proxy statement, as of April 22, large fund groups that owned sizable stakes in Material Sciences included T. Rowe Price (12.9 percent), Gabelli (9.5 percent) and Dimensional Fund Advisors (8.6 percent). Thomson Financial Network doesn't show any analysts who cover Material Sciences. It trades for far less than one times sales.

PeoplePC The fire sale of Internet access provider PeoplePC to Earthlink (ELNK: Research, Estimates) Wednesday is another nice coda on the Internet era. PeoplePC was one of the very last makes-no-sense deals to get done, in August 2000.

Miraculously, the company raised $85 million, before the fees it paid its bankers, Chase H&Q, now JPMorgan H&Q. A big PeoplePC investor was Softbank, once a golden VC investor before duds like, Webvan and wrecked its record. Aside from a few days about a month after its IPO, PeoplePC's shares never went up. Its chart is a perfect illustration of a black-diamond ski slope flowing into a very long bunny hill.

Nordstrom The next family reunion of the Nordstroms promises to be interesting. On Monday Dan Nordstrom, cousin of the retailer's president, Blake Nordstrom, resigned his position as CEO of the company's online operation He'll be leaving the company.

A Nordstrom (JWN: up $0.42 to $24.62, Research, Estimates) spokeswoman told the Associated Press that Dan Nordstrom and another executive, former Lands' End CEO Mike Smith, are planning "to do something where they can utilize their skills a little better." Ouch.

Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at

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