Tyco Shaping Up: Let the Contrarian Investors Rejoice!

| About: Tyco International (TYC)

Hollywood loves Dennis Kozlowski. With him and Kenneth Lay, they have perfect character studies to keep scripting "big business" as a something to be loathed, an evil coalition of men in suits who want to take everybody's money, blow up the ozone layer and kick puppies all at the same time. For all we know, maybe Kozlowski did want to do all of these things but in looking at the current CEO of Tyco (NYSE:TYC), we see that Ed Breen is a man of high moral character and commitment to shareholder value.

I have had the opportunity to hear Ed Breen speak, twice in the last two years, at our alma mater, Grove City College. Breen graduated from the college in 1978 and worked in the broadband and cable industry before moving into the role of President and COO of Motorola in 2001. He was named CEO of Tyco in July of 2002. Once in that role, he cleaned house of the corruption that Kozlowski left behind. He immediately fired the board who hired him and gutted the upper management positions.

Starting Anew
Of the 300 employees at Tyco's headquarters in Princeton, only 12 remain that were at the company before Breen. He wanted to start fresh and needed a clean slate to establish shareholder trust and he has achieved just that, with share prices far outpacing the S&P and bringing tremendous return since he took over.

Breen is a conservative, responsible CEO. Grove City's academic curriculum has always been based on strong moral convictions and rigorous academic standards. They have been ranked by Barron's as one of the 52 most competitive colleges in the nation. He was so grateful for his education there that he just donated 5.5 million dollars to the school.
Breen has utilized these values and has made it a top priority to reduce Tyco's debt, which was at $26 billion, to the company's current amount of $9 billion. The company was left in shambles by Kozlowski and Breen pulled off a remarkable turnaround. He has rolled out hundreds of six sigma programs within the company and stated that he would get rid of an individual business if it wasn't at the top of its industry.

That brings us to Tyco's current state, where it's about to split its business into three entities. The company's current share price is $31 and has been hovering around the mid to high 20's for the past year. Revenue growth has been unimpressive and the company spin-off hasn't generated much excitement. The street really couldn't be more disinterested in the company as the company's P/E (15), operating margins and ROE are below industry and sector averages. JPMorgan analyst C. Stephen Tusa summed it up by saying "Perhaps the most favorable thing one can say about Tyco is that most everybody is pessimistic about the company." The street is down on the company and the share price has been flat-lining.

Nice Returns Anticipated
With that in mind, let the contrarian investors rejoice! Company spin-offs can become very profitable (we've recently seen an ETF focus on this - CSD), as their management becomes more focused, has less constraints to maneuver around and a smaller bureaucracy to deal with. T. Rowe Price analyst Peter Bates expects $15-17 a share for the health care unit, $12-14 a share for the electronics unit and $11-14 a share for the fire-and-security unit. This points to upper range growth of 45% and lower range growth of 22%. Barron's highlighted the stock in their Jan 8th issue and Jim Cramer focused on Tyco Tuesday night (1/23), both anticipating each division of Tyco to benefit from higher P/E's. T. Rowe Price has been building their stake in Tyco as they anticipate nice returns from the spin-off.

Ed Breen will take over the fire-and-security division, under which ADT falls. Kozlowski left ADT in shambles and it is just now turning the corner. Breen's decision to man the entity that needs the most work should prove to be a positive one. His track record at Tyco speaks for itself and he will right the ship in the fire-and-security division. Breen is a man of great integrity and shareholders of Tyco can be secure in knowing that the CEO will do his best to maintain a strong balance sheet, focused business and profitable future.

Disclosure: The author does not own shares of Tyco. The author, while possibly holding a biased opinion, graduating from the same college as Ed Breen, did not receive any of his $5.5 million dollar gift to the school.

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