SIVY ON STOCKS from CNNmoney.com
October 19, 2001

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The Tyco machine

Today's most successful big growth conglomerate, Tyco continues to produce
-- and confound the skeptics.

By Michael Sivy

Since the early 1990s, Tyco International has compiled a superb track
record. Earnings, cash flow and book value have all increased at a compound
rate of more than 17 percent annually. And recently, those growth rates
have actually accelerated. Earnings could be up as much as 30 percent in
the current fiscal year (which ends Sept. 30, 2002), and average 20 percent
growth over the next five years. So what's not to like?

Fact is, though, Tyco has been the target of ongoing criticism by analysts
and journalists that has weighed down the stock for several years. Much of
Tyco's growth has come from acquisitions, and skeptics keep charging that
these acquisitions somehow inflate earnings (although no one ever seems
able to demonstrate exactly how this inflation occurs).

Criticism of Tyco's results always comes back to one of two charges --
either the company is using its overvalued stock to make deals that
effectively buy earnings or it is taking advantage of overly flexible
accounting laws to inflate its profits by hiding expenses in
acquisition-related write-offs. I have never seen convincing arguments that
either of these things was happening. (And neither did the SEC, when an
analyst's negative report in 1999 prodded the commission to investigate
Tyco's finances.)

Instead, I think that Tyco's strategy is just as it appears. The company
buys relatively inefficient businesses with good basic franchises and then
restructures and cuts costs -- boosting total profits. In the past year
alone, Tyco has acquired or agreed to acquire half a dozen companies.
Businesses currently range from fire-protection systems and printed-circuit
board manufacture to undersea cables and disposable medical supplies.

Acquisition-based growth does carry obvious risks. There has to be a
continuous supply of takeover candidates, the company has to be able to
identify the promising ones and quickly boost profit margins after those
businesses are acquired. But Tyco CEO Dennis Kozlowski, 54, has been
demonstrably good at doing these things for a long time. In addition,
Tyco's cash flow has continued to grow even in years when the share price
was too depressed for the company to buy profits through stock-for-stock
takeovers.

With projected growth of 20 percent a year, Tyco [TYC] certainly looks
cheap. At a current price of $58 a share, Tyco trades at less than 16 times
earnings for the current fiscal year.

It's true that to maintain the maximum rate of earnings growth, Tyco has to
continue to make lots of acquisitions. What I consider more important,
however, is the company's solid potential for internal growth. With a
return on equity that has ranged between 15 and 20 percent, Tyco's existing
businesses should be able to outpace the market's historical return of
around 12 percent a year. That alone justifies a P/E higher than 16. The
additional growth Tyco picks up from dealmaking is just a bonus.

###

Read all of Michael's columns at:
http://money.cnn.com/markets/sivy/

To subscribe or unsubscribe to Sivy on Stocks, go to:
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