Tyco's Feeling the Wind at Its Back

Tyco (TYC Quote - Cramer on TYC - Stock Picks) investors, holding their breath ahead of Tuesday's earnings report, are hoping the company doesn't knock the wind out of them again.

After learning of massive new charges last quarter -- identified just months earlier by the supposedly exhaustive probe led by David Boies -- Tyco investors are headed toward another earnings date that could bring more unpleasant surprises. Specifically, the company may finally reveal how it plans to address the staggering $26 billion in goodwill listed on its books. And that decision, guided by strict accounting tests, could tip the company's balance sheet into risky territory.

"If there's a significant impairment -- which is not out of the realm of possibility, given the company's acquisition binge and questionable accounting under [former CEO Dennis] Kozlowski -- it could take them over some debt covenants," said John Boland, a portfolio manager at NI Capital Management whose fund owns 800,000 shares of Tyco and some Tyco debt. "That's not necessarily going to bankrupt the company, but it will drive up borrowing costs. ... And it would certainly bring into question management's credibility, which is probably where the bigger impact would be."

While skittish, Boland is hoping instead for a positive surprise like the one Tyco coupled with last quarter's $1.3 billion accounting blow. He would like to see Tyco again post strong cash flow, which toppled analysts' highest expectations last quarter by coming in at $833 million. He's looking for another $1 billion worth of cash flow this quarter -- and wouldn't mind seeing more -- so that Tyco can easily meet its full-year target of $3 billion.

"They are a cash-flow machine," Boland said. "That's really the crown jewel at Tyco. You can manipulate earnings, but it's hard to fudge cash flow."