Monday, 21 September 2015

Tyco: best thoughts from company management

The first time I wrote about Tyco was on the last day of July this year (link here) where I concluded:

'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'

Since this write-up the shares are sideway-to-down a little: 


Tyco management spoke at a conference last Thursday (link here) and inevitably given the industrial services nature of the business thoughts on the current backdrop were suitably mixed.  For example talking about the North American business: 

'...the overall performance in North America has shown relatively flat, but there has been significant progress that has been made...we have actually began to see the benefit of the work we have done in the commercial security combined with the fire protection and now with the expansion within the – or the continued expansion within the non-resi space'

However...'there is a little bit of frustration relative to our ability to be able to convert the orders to revenue'.  

Looking more widely to the world ex-US operations and specifically Europe... 

'...in spite of the lack of growth in that market, we’ve been able to run those businesses extremely well continuing to improve fundamentals there getting margin raise to low mid teens...this year is played out maybe a little bit softer than what we originally thought, and some of that has been driven by the mix of our oil and gas and heavy industrial base in the UK'

...and then to the more 'rest of the world' portfolio: 

'I don’t see that at least in the near-term getting any better and that will create some headwinds for us in the early part of 2016'

However there are some remaining ongoing structural positives:

'...over the last 18 months with the focus on growth, we are in the middle of transforming company to outside in to getting much more intimate with our customer base, especially within the key verticals that we support'

Pulling all this together I still believe there are some value angles here but there feels no need to hugely rush (wait for another quarterly disclosure etc.) especially when I noted Timken earlier (link here) which is shorter cycle but also currently appears to have a stronger cash flow generation / dividend payment aspect.  

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