This week,

Tyco

(TYC)

is poised to deliver more than courtroom drama.

The recovering conglomerate will attempt to upstage former CEO Dennis Kozlowski -- on trial for

allegedly looting the company -- with a fresh installment of its remarkable turnaround story. The giant corporation is expected to report first-quarter results that will please Wall Street and, more important, foreshadow happier days down the road.

Already, analysts have projected that Tyco will hit the high end of its earnings guidance of 30 cents to 32 cents a share when it reports first-quarter numbers on Tuesday. But now they are also looking for fundamental improvements in core Tyco businesses to set the stage for long-term growth.

UBS analyst David Bleustein recently predicted that the company, dragged down by scandals and poor management in the past, will soon resemble some of its stronger peers.

"We expect Tyco's discount to the group to shrink," wrote Bleustein, who has a buy rating on the stock. "Over the next 12 months, we believe Tyco will be increasingly viewed as a true comparable company to the rest of the diversified industrials."

Just two years ago, as the excesses of the Kozlowski era finally unraveled, some investors were worrying about whether Tyco could stay afloat, let alone thrive. The stock plunged briefly into the single digits in the summer of 2002 as Wall Street wondered whether new CEO Ed Breen could save what appeared to be a faltering franchise, beset by various investigations and a questionable core business.

But since then the stock has done nothing but rise, jumping 67% in the past year alone to $26.75. And many analysts see plenty of upside left: Bleustein, for example, believes the stock could hit $34 this year.

In the meantime, he pointed out, Tyco has managed to shake off some of the big questions that dragged its stock down in the past.

"There continues to be almost no mention of accounting, liquidity or other out-of-the-ordinary issues," Bleustein noted last month.

Turning the Corner

Instead, Bleustein said, Tyco has spent most of its time discussing "growth initiatives, cost reduction programs and end-user market conditions."

Bouncing
Tyco's long road back

Prudential analyst Nicholas Heymann -- who remained bearish on the name far longer than most -- is liking what he hears. He is particularly pleased by Tyco's outlook for its key generator of free cash flow.

Last year, Heymann noted, Tyco relied on its health care division to generate 72% of the company's free cash flow. But some had worried, until recently, that health care was due for a hit.

"We believe fears that margins could slightly decline due to higher research and development spending and modest price declines could have meant that all of Tyco's earnings and free cash flow growth would have had to come from the improvement at Tyco's other businesses," wrote Heymann, who has an outperform rating on the stock. "With Tyco Healthcare margins recently projected by senior management to be flat to slightly higher over the next two years, a major potential hurdle for Tyco shares has been lifted."

Heymann expects Tyco to report first-quarter cash flow of $250 million to $350 million on Tuesday. And he believes his full-year cash flow projection of $3.6 billion -- up from $3.2 billion in 2002 -- could prove conservative.

The analyst sees opportunities for growth throughout the company. Like Tyco Healthcare, Heymann says, Plastics & Adhesives could post single-digit margin gains this year. And be believes the company's troubled Fire and Safety division could deliver the strongest improvements of all.

"This business -- the largest beneficiary of the majority of the company's restructuring program -- is poised to show the most significant improvement in operating profitability in fiscal year 2004," he wrote.

There, Heymann predicts that operating margins could zoom from 8.1% to between 14% and 15% by the end of this year. Meanwhile, he suspects that Tyco's engineered products and electronics divisions are due for a recovery as well.

Turnaround Talk

Merrill Lynch analyst John Inch is particularly encouraged about opportunities in the latter. He said the electronics division -- which accounts for nearly 30% of the company's total revenue -- has already exceeded his 2% sales growth expectation.

"Management reported that Tyco's core organic growth was trending up 3% year-over-year," Inch wrote early last month. "Since there is generally reduced business activity around the holidays, we would not expect much variance for the full quarter."

Like Heymann, Inch is looking for signs of improvement across most of Tyco's business lines. At the same time, he says, the company continues to benefit from "significantly better" financing terms. Late last year, Tyco negotiated a $2.5 billion bank line that lowers its borrowing costs while simultaneously loosening its covenants.

Certainly, the company has made huge strides over the past year. And Heymann, for one, anticipates even stronger gains going forward. Looking ahead, he sees a company that generates significantly more cash flow and earnings that it does right now.

"While there remains several factors which should become increasingly better understood about the company's prospects for fiscal year 2005 and beyond over the course of the next few quarters, we believe growing confidence in the company's ability to achieve $4 billion to $5 billion in free cash flow in 2005 and be positioned to earn as much as $2

per share in fiscal year 2006 would mark the emergence of Tyco from a turnaround to a long-term, above-average growth company," Heymann wrote. "This should represent the third and final stage -- after retaining solvency and now an increasingly successful turnaround -- of the company's remarkable restoration from the brink of bankruptcy in 2002."