Tyco International Ltd.'s Q3 Earnings Down 33%

| About: Johnson Controls (JCI)
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by Chris Martin

It's been a very busy year for Switzerland-based Tyco International (TYC). The multinational conglomerate has a diversified product line that ranges from fire protection equipment to valves and controls to home security system products and services. Investors like what they've seen from Tyco in recent months - but what is in store for the firm in the future?

The answer to that question is somewhat muddled after Tyco posted third-quarter results that were decidedly mixed. On July 31, the company reported a profit of $242 million for the period, which was 33% lower than the year-earlier quarter. But Tyco's earnings per share and revenue numbers were higher than many analysts' expectations. The corporation's per-share adjusted net income figure was $1.01, or 8% higher than what experts had predicted. Tyco also pulled in $4.46 billion (up 3.9% from a year ago) in revenue for Q3, or about $250 million more than was estimated.

Tyco has been under scrutiny by investors since it announced in March that it was spinning off its pipes and valves division into another company that would merge with filter and pump manufacturer Pentair. Tyco officials believed that the conglomerate would be valued higher as two separate companies, so they initiated the merger (which still has to be approved by shareholders). In the third quarter, Tyco recorded $61 million in separation costs. Ed Breen, the CEO of Tyco, told shareholders after the earnings announcement that the deal is expected to be completed by the end of September.

However, many people in the industry are not bullish on Tyco's fourth-quarter earnings. At the end of the second quarter, analysts predicted Tyco's Q4 earnings per share to be around $1.07, but that figure has slipped to $1.04 after the recent earnings announcement. But Breen remains optimistic, saying earlier this month that Tyco plans to "focus on growth, cost management, and productivity initiatives aimed at expanding our operating margins."

Another factor in Tyco's outlook may be its recent strong showing in the stock market. The price of Tyco stock (which trades on the Nasdaq) has risen about 41% over the last year to $58.47 going into the final week of August. That's a figure above which Dividend.com is saying that the stock would experience "overhead resistance" in the near future. This analysis, combined with continued merger-related uncertainty, may lead some observers to believe that Tyco stock may have reached its near-term peak.

Therefore, investors may not want to seek out the Tyco International stock to add to their portfolio anytime soon. While it's not unwise to hold onto the stock for the long-term, investors who are looking to boost their portfolio liquidity may want to consider selling a portion of their current holdings in Tyco. It's quite possible that Tyco's merger will proceed smoothly and the corporation may indeed see the cost savings that they are predicting. But those positive outcomes may not become apparent for a few quarters at least - and with a U.S. presidential election occurring in the meantime, the uncertainty surrounding changes to the economy in 2013 and beyond may affect Tyco's results in ways that are hard to predict. In short, investors probably shouldn't make any significant effort to buy Tyco stock now - but if they already own shares, it's not a bad idea to hang onto them for awhile to see what happens to the company over the next twelve months or so.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.