Friday, 31 July 2015

Friday corporate reporters #1 - Tyco

I have not looked before at the global leader in fire and security solution Tyco (which is rather more famous for certain historical incidents related to shower curtains - link here) but today's corporate update had some good general thematic as well as company specific insights.

At a general thematic level Tyco continued the broader recent theme of highlighting that North America still has relative momentum against other parts of the world (although as per some other companies they also indicated their emerging market equivalent of 'growth markets' also did well).  Note the oil/gas impact observations where they expect a 15% contraction during 2015 year-on-year.

What was specifically interesting about the numbers however was the combination of 'aggressive cost actions' (in an environment where they were disappointed by organic growth), 'operations at high end of guidance' and...

...sequentially good year-on-year orders growth: 

With the company talking about a Q4 operating income run-rate in excess of US$1.5bn (putting the company prospectively on around a x10 EV/ebit multiple) plus the level of net debt around x1 ebitda options remain. Of course M&A remains on the agenda with (as per the conference call) a focus on innovation, technology and related.  They have spent just over US$500m with a potential over the next six odd months of another US$200-500m.  That's no problem for the current balance sheet.  

Cash flow is a little muted although they can cover the current 2.3% dividend yield and talk about moving back to 100% cash conversion by the end of the year again.  They also noted that they would be contributing just over US$300m+ to an asbestos fund - a longer-term liability / risk investors should be aware of (although I tend to find that the stock market is generally overly fearful of such exposures).  Additionally there is still the IRS tax settlement issue on inter-company debt (link here).  They have the balance sheet however to absorb such issues. 

With the shares kicking around a 52 week low the shares feel underloved.  Yes there are some different challenges (see asbestos above) to other low double digit EV/ebit industrial concerns (see my write-up here) but my perception is that the company is moving towards a perception inflexion point where potentially the profile of the company may change to (as management desire) a x1.5 GDP growth profile.  I like the cost cutting and what appears an ok backlog.  For me one to consider at prevailing. 

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