Tricky Times for Tyco

The company reported higher quarterly profit but noted slowing in key markets as it gets ready to split itself in three

Tyco International (TYC) announced stronger financial results on Feb. 6, even as the conglomerate continues to recover from the scandals that had made it a poster child for corporate misbehavior before CEO Ed Breen took the helm in 2002. But while the company updated investors on its new direction as it splits into three separate companies, it also warned of slowing business in the coming months.

Tyco reported that net income during the three month period ended Dec. 29 amounted to $793 million, up 42.6% from the same period last year. Meanwhile revenue grew 7.6% year over year to $10.3 billion overall, with revenue from existing businesses growing 5% from last year. "This was a quarter of good top-line growth and solid operational progress," said Breen in a press release Feb. 6.

Breen has already navigated the company through the accounting scandal and liquidity crisis he inherited when he took his job. Now he's trying to simplify Tyco by splitting it into three independent, publicly traded companies (see, 1/13/06, "The Trouble with Tyco"). On Jan. 18, Tyco announced that it filed documents with the U.S. Securities and Exchange Commission to register equity and debt securities for Tyco Electronics and Tyco Healthcare. (The latter will be named Covidien after it separates this spring.)

While sales in most business segments improved during the fourth quarter, Tyco's profits remain weighed down by the hefty price tag for its transformation. The company said in recent months that it plans spend $600 million on restructuring, with most of those costs incurred during fiscal year 2007.

Even as Breen pushes ahead with more changes, his business faces headwinds. "After a period of strong growth, we are seeing some slowing in certain electronics markets, in particular the computer and communication infrastructure equipment markets, which we believe will strengthen as we move further into the year," Breen said in the press release. "In addition, we expect metals spreads in Engineered Products & Services to continue to be weaker than last year in the second quarter, with improvement in the second half of the year."

Investors sold the stock 1.6% to $32.69 in early afternoon trading on the New York Stock Exchange Feb. 6.

"The company is gradually overcoming the operating problems that vexed it throughout most of last year," said Morningstar analyst Eric Landry in a research note.

Standard & Poor's equity analyst Mike Jaffe lowered his forecast on Tyco's earnings for fiscal year 2007 and 2008, explaining that the company is likely to have lower sales from internal businesses. But Jaffe kept a hold opinion and lifted a target price on the stock by $2 to $34 per share, noting the likelihood that Tyco's planned split into three companies takes place in the June quarter. "We think likely benefits of the split merit a small premium to the S&P 500," Jaffe said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.)

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