Former Bad Boy Makes Good

11/08/2010 11:45 am EST

Focus: STOCKS

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

Taesik Yoon, editor of Forbes Growth Investor, says the erstwhile poster child for corporate corruption is a solid company that’s growing strongly.

Tyco International (NYSE: TYC) is a diversified global provider of security products and services, fire protection and detection products and services, and other industrial products under the ADT and other brand names.

In May, TYC acquired the Broadview Security business from Brink’s Home Security, becoming the largest provider of electronic security in the world.

We expect the Broadview acquisition to result in strong sale and operational synergies with TYC’s legacy ADT security business. It also broadens the company’s portfolio of higher growth businesses with recurring revenues, which also carry higher margins than product sales and systems installation revenues.

Furthermore, Broadview primarily serves residential customers, which have held up better than the commercial market. We expect this business to help lead to another strong operational showing when Tyco reports fiscal 2010 [fourth-quarter] results on [Tuesday,] November 9th.

North America is [Tyco’s] largest market, responsible for 48.2% of fiscal 2010 revenues. This is followed by Europe/Middle East/Africa at 27.3%, Asia Pacific at 15.7%, and other Americas at 8.8%.

Revenues in [the fiscal third quarter] grew 2.9% year over year to $4.27 billion, boosted by contributions of Broadview Security. While [organic] revenue growth was flat, this was a marked improvement from the first half, where revenues fell 7.7% organically.

The operating margin, adjusted for acquisition-related charges and other special items, expanded 122 basis points to 10.37% as it benefited from prior restructuring and cost-reduction initiatives. Adjusted net income jumped 28.4% to $357 million or 72 cents per share—eight cents ahead of the consensus estimate.

The company’s improving operations could stall if the global economic recovery proves weaker than expected. Yet [the company indicates current growth trends will continue]. Indeed, recent order activity has been strong, with total global bookings up 5% in [the third quarter] from the prior year.

The systems installation and services side of its ADT business finally seems to have turned the corner, with organic revenues up for the first time in seven quarters. Similarly, it appears its fire protection services business has stabilized, with backlog at the end of fiscal [third quarter] up 5% sequentially, to $1.2 billion.

The planned sale of its European Waterworks operations for approximately $245 million enhances its already strong balance sheet and allows the company to focus on businesses with better growth prospects.

TYC’s aggressive share-repurchase activity also signals management’s confidence in the company’s prospects. At the end of [the third quarter], TYC had spent $575 million under an existing $1-billion stock-buyback authorization to repurchase 15.8 million shares. It recently announced a new $1-billion share purchase program, which should further reduce total shares outstanding and add incrementally to earnings per share.

Furthermore, a planned tax-free spin-off of its Electrical & Metal Products business expected in the first half of 2011 could result in further shareholder value [enhancement].

(Tyco’s stock closed below $39 Friday—Editor.)

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