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Favorite Stock: Tyco
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December 18, 2001: 11:47 a.m. ET
Equity strategist likes conglomerate's cash flow, management and valuation.
By Staff Writer Andrew Stein
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NEW YORK (CNN/Money) - From garbage bags to kennel pads for dogs to circuit boards -- it all falls under Tyco International's manufacturing umbrella and makes the company the favorite stock of Salomon Smith Barney's equity strategist, Tobias Levkovich.
"This is a company that can do well in a good economy, and do well in a so-so economy," said Levkovich. "It's not isolated to a single sector like so many of these tech companies that struggle because their sector slows down."
Indeed, Tyco controls more than 200 units, and is in the process of buying two more: TyCom Ltd., its previously spunoff undersea cable unit, and adult diaper maker Paragon Trade Brands.
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Salomon Smith Barney's Tobias Levkovich | |
Tyco's spread across the manufacturing sector and aggressive acquisition plan has treated investors well over the years, with earnings, cash flow and market value posting annual growth of 17 percent since the early 1990s.
The beat goes on for Tyco as the Bermuda-based company expects revenue of $44 billion in 2002, a 20 percent increase from 2001. It also sees $4 billion in cash flow for 2002, a staggering 60 percent increase from the year before.
Levkovich explains what else makes Tyco International his favorite stock.
What draws you to Tyco?
There are really four things that are attractive about Tyco. The first is its diversity -- it's somewhat protected from one singular theme. A singular focus in the tech sector ended up burning a lot of investors. Diversity is a real plus.
The second is they have great cash flow. They are sitting on a couple billion in cash and when lenders start tightening up on loans, this allows them to continue to finance their growth.
The third is they have a great management team. They are lean in ranks, but these guys really know what they're doing. They are so good at controlling costs.
The fourth is valuation. Tyco is valued at about 16 times earnings in a market that is priced about 24 times earnings.
Why Tyco and not another manufacturing conglomerate, namely General Electric?
Well, GE is the ultimate diverse company and Tyco has been called a mini-GE, and its chief executive, Dennis Kozlowski, has been called the next (former GE chairman) Jack Welch.
Tyco's valuation is better than GE's and its acquisitions have a positive impact on results. A company like GE is so big that, when it acquires a company, the purchases don't really change its bottom line.
Is Tyco's use of pro forma results a concern, especially after the Enron collapse?
Enron was more of an accounting thing, and any company that plays accounting games will get caught. A short seller raised a question about Tyco's accounting and the Securities and Exchange Commission held an informal investigation and said its accounting was fine.
Click here to check other manufacturing stocks
Does a company like Tyco have to bring in pro forma numbers? Yes, because it has to give a clear picture of where things are going. It lets investors know what the business looked like before an acquisition was made. Pro forma results are a tool and not a problem if used properly.
Tyco spunoff its undersea cable unit, TyCom, when the telecom sector was doing well and prices were high. It's now buying it back when the sector is struggling and the stock has sank. Any concern with that?
Rather than have that stub out there, they're going to buy it back. It wasn't a business plan, Tyco just took advantage of the market conditions and TyCom was primed to be repurchased.
Do you have any financial stake in Tyco?
I do not cover it for Salomon Smith Barney, I do not own it personally, but it is on the firm's recommended list. 
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