|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||67,000||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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Tyco International Ltd. (NYSE: TYC)
F/d Market Cap: $67 billion
F/d Enterprise Value: $72 billion
Tyco is a conglomerate of great businesses that have the opportunity for margin and revenue improvement over the next 3 years. While management has done an excellent job on addressing liquidity concerns and stabilizing the company after the Kozlowski-era, there remains a significant opportunity to improve the profitability of each business.
With the company now conservatively capitalized and most issues stemming from the Kozlowski-era addressed, management is spinning-off the Healthcare and Electronics divisions so that there will now be 3 separate publicly-traded companies (Fire & Security and Engineered Products is the remainco).
With the spin-offs to be completed within the next 2 months, management of each company will have a renewed focus and incentive to fix the various operational issues at each company.
Tyco currently trades at 16x consensus 2007 earnings. However, we believe that within 3 years each company will have substantially improved profitability resulting in Tyco trading at only 9x our expected 2010 earnings.
Specifically, we believe that in 3 years the individual divisions will be worth the following:
Fire and Security: $21.00/share
Engineered Products: $6.50/share
Current Net Debt: ($6.00/share)
TYC Total: $60.00
This valuation implies that the total combined intrinsic value of TYC in 2010 will be $60/share or roughly double the current price. Importantly, this valuation uses estimates that we believe are conservative, and ignores what is currently too little leverage in the capital structure. There is upside to our valuation in a high case outcome.
Due to the size of the company and our desire to keep this write-up short, we are going to forego describing the businesses (read coda’s excellent write-up from last year) and list our assumptions for what we think will happen to the profitability of the 3 businesses over the next 3 years. We are more than happy to dive deeper into our assumptions and the competitive positioning of each business in the Q&A.
We expect at least 25% operating margins and 4% revenue growth to 2010 which will result in $1.00/share of eps. At 18x earnings and cash build Healthcare will be worth at least $20/share on 2010 numbers. Key assumptions driving these estimates are:
We expect 17.4% operating margins and 6% revenue growth to 2010 which will result in $1.00/share of eps. At 17x earnings and cash build Electronics should be worth around $18.50/share on 2010 numbers. Key assumptions driving these estimates are:
Tyco Fire and Security
We expect $13.7 billion of revenues and a 25% EBITDA margin to drive earnings of $1.05/share by 2010. At 18x earnings and cash build Fire and Security should be worth $20/share on 2010 numbers. Key assumptions driving these estimates are:
We expect EBITDA margins of 15% and revenue growth of 4% to 2010 to result in $.44/share in earnings. At 13x earnings and cash build Engineered Products should be worth $6.50/share on 2010 numbers. Our estimates are based on disclosed financial results and target EBIT margins given by management.
The market has begun to price in the upcoming spin-off by using a sum of the parts valuation. However, people are missing the magnitude of how poorly each division has been integrated from the acquisition binge of late 90’s and early century. There is a large amount of potential for operating margin expansion once each management team is incentived and focused on these issues. The market will begin to give the companies credit for these improvements in profitability once the businesses are separate and management has begun to outline and quantify all the opportunities in front of them.
Fire and Security:
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