Looking Beyond the Scandal at Tyco

| About: Tyco International (TYC)

Most people are familiar with Tyco through the high-profile convictions of Dennis Kozlowski and Mark Swartz (they appealed their convictions in early October). Yes, it has been a rough few years for the company due to these scandals.

The revelations may get even worse. Another executive, Raymond Scott Anderson, recently pled guilty to falsifying tax returns back in 1999. Anderson has agreed to cooperate with prosecutors, so we’ll see if any more news emerges.

Despite these stains on its reputation, Tyco is actually an excellent company. Its ADT security systems are among the best and most popular in the industry. Tyco also has excellent electronics, healthcare, and engineered products divisions. Its profit margins are near 10%, which are good for the industry, and the company is currently working hard to improve profitability. It has tried to make its inventory management more efficient and has cut employee costs, and it recently discontinued its Plastics and Adhesives division, which was hampering the company’s profitability. Tyco has little debt and pays a modest dividend.

But there are reasons to be cautious beyond the bad publicity. Tyco’s growth has been pretty weak for the past couple of years. Last year showed a 25% jump in revenues, but that came from just one quarter; the rest of the year was in a lull. This year has shown minimal growth over 2005. The company recently backed off a controversial options-backdating policy after receiving a warning from an outside compensation consulting company -- which makes me wonder a bit. Of course, the electrical divisions have to contend with the soaring price of copper. Commodity prices have really taken a bite out of numerous businesses.

If you’re not discouraged by the scandal headlines, you might be able to make some money on this stock -- if you buy at the right price. But I wouldn’t pick it up if you’re looking for rapid growth.

Type of stock: A solid industrial company that makes excellent products despite some major (historical) management scandals. But Tyco is in the right growth areas and poised for a come back as Wall Street looks for undervalued alternatives.

Price target: At $29 today, this is a volatile stock. Its 52-week high and low occurred within a single month. The good news is that the stock hasn't dropped below the mid $20's since mid-2003. If you want a stock without much downside and modest upside, this could be a good pick the next time it dips below $25.

TYC 1-yr Chart