Publish date:

Longtime Tyco Bear Joins Bull Camp

Prudential analyst Nicholas Heymann upgrades the stock from hold.

A

Tyco

(TYC)

bear has changed his stripes.

The last, stubborn holdout on Wall Street has a buy recommendation on Tyco's shares for the first time in recent memory. Prudential's Nicholas Heymann joined the crowd of optimists this week, when he upgraded Tyco -- long rated an outright sell -- from hold to buy, and raised his price target on the stock a whopping 60% to $24.

Heymann, who earlier predicted that Tyco would languish around $15 for some time, conceded Tuesday that the stock -- already approaching $18 -- could easily jump much higher. But he stopped well short of casting his old caution aside.

"We would not fail to point out that we believe Tyco continues to face significant hurdles, both operationally and in the legal arena, which are likely to persist as areas of potential concern for investors," Heymann wrote in his upgrade Tuesday.

Indeed, Heymann is cooler on Tyco than on a whole basket of stocks he included in an industrywide upgrade this week. He remains consistently bullish on

General Electric

(GE) - Get General Electric Company (GE) Report

, which he's touted as a buy for a while. Together with GE, he now recommends

Cooper Industries

(CBE)

,

Honeywell

(HON) - Get Honeywell International Inc. (HON) Report

and

Rockwell

(ROK) - Get Rockwell Automation, Inc. Report

-- all with fresh buy ratings -- among his "first-tier" choices. He likes

TheStreet Recommends

Danaher

(DHR) - Get Danaher Corporation Report

,

Emerson

(EMR) - Get Emerson Electric Co. Report

,

SPX

(SPW)

and

United Technologies

(UTX) - Get United Technologies Corporation Report

-- also raised to buy -- as second-tier picks. And he ranks Tyco, swept up in the general upgrade, as a "high-risk special situation" stock in a third tier by itself.

Heymann kept Tyco's old 2003 earnings estimate of $1.40 intact, however. Indeed, he upgraded the entire sector, because he foresees sharp changes in the economy rather than in the companies themselves. Although he sees no real recovery until next year, he believes stocks like Tyco will continue to move up on "the best prospects for a sustainable recovery in the industrial segment of the North American economy in three years."

In the meantime, however, he admits that sector-wide targets for 2003 may still prove too aggressive. And he believes Tyco, in particular, faces significant risks even after that.

Specifically, Heymann expects Tyco to resolve shareholder lawsuits by issuing new stock that significantly dilutes current shares. He also points out that Tyco is still undergoing "one of the largest

investigations ever undertaken" by the

Securities and Exchange Commission

. As a result, he expects that Tyco may face new accounting adjustments in addition to potential writedowns of the "significant" $26 billion in goodwill currently on the company's books. And he believes that debt -- which could have triggered a liquidity crisis earlier this year -- will remain a challenge going forward.

"All these issues notwithstanding," he wrote, "we believe Tyco -- although not a Tier 1 buy-rated stock -- will move upward and in-line with the rest of our group."

Heymann's upgrade, coupled with a raised price target from Merrill Lynch, helped jumpstart that climb. The stock burst to a 2.9% gain, jumping 53 cents to $18.38, before settling back to close Tuesday at $17.88. It inched up 16 cents to $18.04 Wednesday.