Reviving a Ghost of Scandals Past

03/11/2009 12:00 pm EST


George Putnam

Editor, The Turnaround Letter

George Putnam IV, editor of the Turnaround Letter, says the notorious Tyco International is now lean and focused, with a strong balance sheet and a good dividend.

Tyco International (NYSE: TYC) began in the early 1960s as a high-tech company based in Massachusetts. It grew gradually through the 1970s and 1980s, largely by acquisition.

The pace of acquisition accelerated rapidly in the 1990s after Dennis Kozlowski took over as chief executive officer. Between 1992 and 2001, revenues grew from $3 billion to $34 billion as Tyco purchased more than 1,000 companies.

In 2001 Kozlowski came under fire for his lavish spending of company funds, and questions were raised about Tyco’s accounting policies. Kozlowski resigned in mid-2002 and was eventually convicted of misappropriating company funds.

Under Kozlowski’s successor Edward Breen, Tyco has divested a large number of assets. In 2007, [it] capped off its restructuring effort by splitting into three separate businesses: Tyco International (the subject of this recommendation), Tyco Electronics, and Tyco Healthcare (now called Covidien).

Breen cleaned house in the executive suite shortly after he took over, and eliminated the company’s flamboyant culture. He brought in a team of new managers who run the various businesses with quiet competence.

Tyco is now a much leaner and more focused company. It has five main business segments: security systems under the ADT brand, fire protection services, safety products, flow control products (such as valves and pipes), and specialized electrical and metal products.  While none of these are particularly sexy, they are solid businesses that generate strong cash flow and have decent growth prospects around the globe.

In all of its business segments, Tyco’s units have a strong, often leading, market presence and well-known and -respected brands. All of the businesses are well-positioned not only to weather the current worldwide downturn but also to grow nicely when economic conditions improve.

During the downturn, Tyco should fare better than many industrial companies because more than one-third of its revenues come from ongoing monitoring and servicing activities, as opposed to new sales of products.

The company’s once-bloated balance sheet is now lean and solid. Debt is down from $26 billion when Breen took over to about $4 billion at the end of December. Cash flow should remain strong, and Tyco is well-positioned financially to gain market share at the expense of weaker competitors. It also pays a healthy dividend. (It yielded 4% at Tuesday’s close—Editor.)

In the eyes of many investors, Tyco is still tainted by management’s less-than-exemplary behavior nearly ten years ago. But in reality, it is now a solid and well-managed company that should weather the downturn well and thrive when conditions improve. We recommend buying Tyco International up to $27. (It closed above $18 Tuesday—Editor.)

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