Restructuring Tyco

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When Tyco(TYC Quote) reports earnings Thursday before the market opens, many investors will be looking beyond the numbers and focusing on the company's restructuring plans. A spinoff could boost the stock.

All of this restructuring news will make for a complex call, and I'll be looking for signs that the restructuring will unlock value.

I'm a Tyco shareholder and I like the company's strong cash flow and the stock's attractive valuation.

Tyco is a conglomerate with sales of about $40 billion. The firm is divided into four segments: Electronics ($12 billion in sales), Health Care ($9.5 billion), Fire and Security (11.5 billion), and Engineered Products and Services ($6.5 billion). These segments have been built over the years through an aggressive acquisition program, and now management plans to break up the company. I estimate the sum-of-the-parts value of Tyco as $30 to $33 per share, broken down as follows: $15 to $16 for Health Care, $10 to $12 for Electronics, $5 to $8 for Fire/Security/Engineered products.

Tyco recently announced that it is splitting into two segments, with the long suspected spinoff of its Health Care and Electronics businesses. (This leaves Fire/Security/Engineered Products.) Tyco also announced in December that it has sold most of its plastic and adhesives business to Apollo Management for $975 million. Tyco's plastic coat hanger business ($175 million) was excluded from the sale, and is expected to be sold soon. When all is said and done, the company should receive about $1 billion in after-tax proceeds for this segment. The firm could use this to help reduce its $10 billion in debt.

Street expectations have been recently reduced to $9.81 billion in sales and $0.38 in EPS. I expect EPS guidance for 2006 to be $1.82-$1.90, down slightly from previous range. I believe that profits have been hurt by slow growth, distractions from the pending restructuring, and a higher tax rate due to the complexity of tax planning. Below I take a look at the results of each business segment.

To view Robert Martorana's video take of Tyco, click here.