TYC (NYSE)

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Tyco International (TYC, NYSE)

If you have not already done so, make a mental note that stock markets are not about value, cycles, commodities or materials; the stock market is about investing to make money, more money than you would otherwise get in a bank account or savings bonds. More simply put, it is about growth, particularly of your net worth. Of course, net worth can grow in many ways, even by successfully buying a lottery ticket or having a winning streak at a casino. But that is for another article. Growth in your account can also happen by picking stocks in wheat, corn or oil when they are down and waiting until they go up. But really, growth by definition must come from sectors and stocks that are growing, short term disappointments aside. This is pretty obvious stuff, for what else would explain the fury with which investors chase technology stocks even today, as soon as they hear the slightest bit of good news. The market is starving for growth.

How do you improve your chances of having growth in your portfolio? You can find a cracker jack mutual fund manager with good track record and even more importantly a good strategy that you can understand and agree with. You could also invest with the herd, which can be rewarding in good times but disastrous in bad. You can rely on the analysts and media for information but that has been a major disappointment lately. Or, you can try to find the consolidators in a growing sector who make opportunistic buys and sells of companies rather than stocks. Names in this category are few high profile ones like Jack Welsh of GE and Warren Buffet of Berkshire. Jack is retiring this fall and Warren is also getting long in teeth. Lot of people were pinning their hopes on Mike Armstrong of AT&T and Bernie Ebbers of WorldCom but their entire sector is being picked apart. Finding a consolidator is not easy but the right one can make your net worth grow well above all others.

One fellow who can't seem to get respect is Dennis Kozlowski, Chairman and CEO of Tyco International Ltd. Every time he makes a move, the stock market develops a new series of doubts and hammers his stock. After the announcement this spring to buy the CIT group, the stock was hammered by more than 40%. it has recovered some of its loss but still trades a good 20% below the high and at a paltry P/E ratio of 17. In spite of proving time and again that Kozlowski can and does add value through acquisition, the stock suffers. It has produced a return on equity of 29% and exceeded Wall Street estimates at a time when most are happy just meeting the numbers.

For the six months ended 3/31/01, sales rose 23% to $16.92 billion. Earnings before extraordinary item and accounting change rose 34% to $2.16 billion. Results reflect organic growth and acquisitions, and a $407 million gain on the sale of ADT Automotive. So far, there has been no "warning" from the company which bodes well for this quarter.

Tyco International Ltd. is a diversified manufacturing and service company. Through its subsidiaries, the Company designs, manufactures and distributes electrical and electronic components and multi-layer printed circuit boards; designs, engineers, manufactures, installs, operates and maintains undersea cable communications systems; designs, manufactures and distributes disposable medical supplies and other specialty products; designs, manufactures, installs and services fire detection and suppression systems and installs, monitors and maintains electronic security systems; and designs, manufactures and distributes flow control products and provides environmental consulting services. In December 2000, the Company acquired Lucent Technologies' Power Systems (LPS) business unit. LPS provides a full line of energy solutions and power products for telecommunications service providers and for the computer industry. As you can see it is a true conglomerate with just one piece missing, financial services. 

CIT proved to be the missing piece for Tyco because it is a leading, global source of financing and leasing capital and an advisor for companies in more than 30 industries. Managing more than $50 billion in assets across a diversified portfolio, CIT offers vendor, equipment, commercial, factoring, consumer and structured financing capabilities. Although significantly smaller than GECAS, the unit of GE that was deemed to be too anti-competitive for the Europeans, this puts Tyco on a strong footing or at least that is the hope. Obviously the stock market does not agree and needs to be shown that there are no skeletons in the CIT closet.

Another reason the stock is out of favour has to do with the general state of the industrial economy. Even GE is off by a good 20% from its high. Assuming that the industry will turn around some day, is it not better to bet on a company that is trading at lower price to earnings multiple? Here is an opportunity to buy growth at a value price.

Last Updated July 14, 2001