On May 29, Zacks Investment Research downgraded security and protection services provider Tyco International Ltd. ( TYC ) to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold), primarily due to downward estimate revisions.
Despite the downtrend, the company still has the potential to drive the stock up. The stock is currently trading at a forward P/E of 22.0x and long-term earnings growth expectation of 14.3%.
Why the Downgrade?
Tyco recently completed the sale of its South Korean security business to asset management company The Carlyle Group LP ( CG ) for $1.93 billion in cash. The operating units that were divested included Tyco Fire & Security Services Korea Co. Ltd., ADT Caps Co., Ltd., Capstec Co. Ltd. and ADT Security Co. Ltd., which together formed and operated the South Korean security business under the name ADT Korea.
With approximately $600 million of revenues and $125 million operating income estimated for fiscal 2014, ADT Korea was expected to contribute 20 cents per share to Tyco's fiscal earnings. Consequently, Tyco updated its recurring earnings guidance range for the second quarter of fiscal 2014 to 39 cents - 41 cents per share, down from the prior guidance of 44 cents - 46 cents per share to take into account the discontinued operations.
Over the last month, most of the earnings estimates for Tyco were revised downward for the next quarter as well as for fiscal 2015. This seems to be the fallout of lackluster results in the recently reported quarter and an insipid guidance. Given the challenging macroeconomic environment, it appears that management is finding it quite onerous to battle the margin pressures. Tyco's growth is largely dependent on its ability to adapt in both developed and emerging economies by developing or acquiring new technologies that achieve market acceptance with reasonable margins - a challenging situation to grapple with at present.
Other Stocks to Consider