FBR Capital Downgrades Tyco International (TYC) to Market Perform

FBR Capital downgraded Tyco International (NYSE: TYC) from Outperform to Market Perform with a price target of $42.00 (from $44.00).

Analyst Ajay Kejriwal commented, "This follows the analyst meeting last Friday where Tyco provided its FY16–FY18 outlook, which, in our view, is a "best-case" road map with some pretty optimistic assumptions that leave little room for contingencies. Specifically, Tyco's 3%–5% revenue CAGR goal for FY16–FY18 is ~150 bps higher than achieved in the past few years. A key driver of this acceleration appears to be service revenue (40% of total) that is expected to grow 4%–5%, or up sharply from +1% in FY14. Tyco expects to continue to aggressively pursue branch consolidation and restructuring efforts over this period, which, in our view, will be growth headwinds. Additionally, Tyco's 24% revenues in Europe could weigh on overall growth. Tyco expects operating income to increase by $400 million over FY16–FY18, or similar to the growth in FY12–FY15E. However, the FY16–FY18 growth appears to be more heavily dependent on leverage from organic revenues (+$350 million versus +$200 million), and any revenue shortfall would have a more significant earnings impact than in the past, in our view. Finally, Tyco's earnings model appears "fully loaded," assuming full use of FCF for dividends and share buybacks, leaving limited degrees of freedom on the balance sheet to compensate for any revenue deficits or any contingencies including from legacy tax items. This "best-case" scenario has elevated investor expectations, and while we are not calling for downside yet, we see risks as the story transitions from one driven by restructuring savings to one driven more by organic growth. Shares have been rerated in the past two years and are now at a premium to peers at 16.2x PE on FY16 EPS estimates. We see significantly better opportunity in Outperform-rated DHR, ITW, and MMM."

For an analyst ratings summary and ratings history on Tyco International click here. For more ratings news on Tyco International click here.

Shares of Tyco International closed at $42.89 yesterday.

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