Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Enterprising Investor – November 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Tyco International Limited (TYC) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Tyco International Ltd. (Tyco) is a diversified company, which provides security products and services, fire protection and detection products and services, valves and controls, and other industrial products. It operates in five segments: ADT Worldwide, Flow Control, Fire Protection Services, Electrical and Metal Products, and Safety Products. During the fiscal year ended September 24, 2010, the Company’s Flow Control segment acquired two Brazilian valve companies, including Hiter Industria e Comercio de Controle Termo-Hidraulico Ltda (Hiter), a valve manufacturer which serves a variety of industries, including the oil and gas, chemical and petrochemical markets. In May 2014, the Company announced that it has completed the sale of Tyco Fire & Security Services Korea Co. Ltd. and its subsidiaries that form and operate the South Korean security business to The Carlyle Group.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$35.73|
|Value Based on 0% Growth||$20.94|
|Market Implied Growth Rate||4.31%|
|Net Current Asset Value (NCAV)||-$5.42|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Tyco International Limited is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned by the low current ratio, lack of earnings stability or growth over the last ten years, and the high PB ratio. The Enterprising Investor is concerned by the level of debt relative to the current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time. From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.39 in 2010 to an estimated $2.46 for 2014. This level of demonstrated growth is greater than the market’s implied estimate of 4.31% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Tyco International Limited (TYC)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Tyco International Limited (TYC) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.