When bullish investors look at
, they see a sick stock price. What they don't see-- despite an onslaught of scandalous headlines -- is a sick company.
There's no mistaking that a lot of people think Tyco is seriously ill.The always well-stocked Tyco bear camp has grown crowded since indictmentsstarted flying this summer; short interest in the heavily traded stock isup 35% since May. Short-sellers note that the company remains under a cloud of various investigations, a mountain of debt and an ongoing reviewof the discredited former management's books.
Even so, a growing group is boldly wagering that the removal of DennisKozlowski and his toxic avengers has at last freed this far-flungconglomerate to fulfill its promise. Some of these people -- who bought Tycoin the single digits -- have already made a fortune betting against a tide that has pulled the stock down 70% this year. Recently, Wall Street has gotten into the act, with a number of firms endorsing the rebuilding efforts of new CEO Edward Breen.
Their argument? Regardless of the jaw-dropping executive antics, Tycoremains a multi-industry powerhouse that snatched up many top-notchproperties during a frenetic 10-year buying spree. Bulls are particularlypleased with Tyco's latest acquisition: Breen, the former
president whose sparkling reputation -- and relentless housecleaning --has led a late-summer rally. Some fans even shake off lingering accountingworries.
"Tyco's got a new CEO and CFO," said Don Yacktman, whose
Yacktman Focused fund owns a big slug of Tyco stock. "It behooves them to move anythingbad out of the background.
"If something's there, it should have already come out by now."
Here's how committed the bulls are: Even the recent disclosure oframpant internal looting brought strange relief to some Tyco investors.
Yes, it was hard to fathom that Kozlowski had tapped Tyco's accountsfor a multimillion-dollar birthday splash -- complete with exotic animals-- for his wife. Or that he'd siphoned many millions more for lavish realestate and yachting adventures and perhaps the only $445 pincushion knownto mankind.
Some staunch Tyco bulls shook their heads alongside critics like Peter Cohan, a Massachusetts author and investment strategist, who asked apressing question after reading Tyco's disclosures: "I think it would beuseful to know what a 'traveling toilette box' is," he said, "and whyKozlowski needed to pay $17,000 for it?"
But as outlandish as these purchases were, some bulls argue,at least they were documented with receipts and already expensedin Tyco's financial statements. These investors take some heartin the fact that management failed to hide such incriminatingtransactions altogether. And they argue that silence from a new managementcommitted to resuscitating the company's reputation suggests no otherskeletons have turned up in Tyco's many closets.
"No news is good news," wrote analysts at Deutsche Bank, one of manyWall Street firms to rate the stock a buy, last week.
The Other Side
Indeed, this week's filing revealed that Tyco actually bypassedopportunities to capitalize on at leasttwo Kozlowski real estate deals. Instead of purchasing Kozlowski's $7million Park Avenue apartment at depreciated book value, for example, Tycocould have paid a higher price and then recognized a tidy one-time gainupon disposal of the property. And while Tyco overpaid Kozlowski for one ofhis homes -- shelling out triple its real value -- the company promptlytook the $3 million writedown required under generally accepted accountingprinciples.
Ironically, some say, the internal looting may give a slight boost toTyco's reported earnings.
"They've expensed all this stuff," Yacktman said. "So they may haveactually beenunderstating their earnings."
Wall Street analysts have expressed similar relief. On thewhole, they have raced to embrace the "new" Tyco, viewed as far lessworrisome, since the departure of former CEO Kozlowski and two senior-levelcohorts now under indictment. They predict, on average, that Tyco's stockwill more than triple from $16 to $53 within the next year.
That's the optimistic take. The Manhattan district attorney took adifferent stance in sweeping indictments issued last week. The DA said Kozlowski, CFO Mark Swartz and top lawyer Mark Belnick "falsely enhancedoperating performance" by passing off the extortions as legitimate expenses.
Prudential Securities, the lone research house predicting a slide inTyco's share price, has declared the company's books "invalidated." Thefirm believes Tyco's liquidity, already an issue, will be threatened by anyfraud-triggered restatements.
Meanwhile, David Tice, a well-known Tyco short seller, expects anotheraccounting shoe to drop. Tulsa money manager Fredric E. Russell, who has noposition in Tyco stock, tends to agree.
"I would be very surprised if there hasn't been some great exaggerationof revenues that results in some pretty big writedowns," Russell said. "Wemay discover that a lot of Tyco's cash is actually fictional.
"To me, the guy who's investing in Tyco is a guy who is just plaingambling."
Clipper fund, which ranks among Tyco's largest investors,clearly feels the potential rewards far outweigh the perceived risks whereTyco is concerned.
In its most recent letter to clients, the fund attempted to explain whyit had poured 9% of its investment dollars into a "controversial" stocklike Tyco. The fund took comfort in the fact that the
Securities andExchange Commission
discovered no material accounting problems during aTyco inquiry three short years ago. And it saw market panic fueled by the"cockroach theory" -- where some are visible, more are likely -- as thedoor to a great buying opportunity.
"If there is any significant accounting fraud, it is buried so deeplythat neither auditors nor federal investigators can find it," the letterstated. "Only a giant, mutant cockroach-sized problem can justify
Tyco'scurrent modest stock price."
Yacktman, for one, isn't overly worried. He said Tyco has already shedthe financial division -- CIT Group -- most susceptible to accountingtrickery.
"If there was a place to play accounting games with operating numbers,that was it," Yacktman said. "And it's gone now."
The Moving Parts
Tyco bills itself as the world's leading manufacturer of everythingfrom electronic components to underwater telecommunications lines tosecurity systems. Bulls particularly like another major Tyco business --medical supplies -- because of the company's dominant position in a rapidlygrowing marketplace.
But sales in some crucial areas, like electronics, have been slippingwith the overall economy. And the company may soon attempt to unload TyCom,its money-gobbling undersea cable network, altogether.
Meanwhile, "distraction costs," caused by business-sapping scandals,could whack 15% from this year's earnings per share.
Yacktman recognizes the risks of investing in Tyco, a fallen WallStreet darling whose former top executives may wind up in prison forlooting the company. But he also recognizes -- and has already tasted --the rewards.
Yacktman's fund bought Tyco, now a $16 stock, when it fell below $10this summer. Tyco remains the fund's largest investment,representing 10% of the portfolio, because Yacktman believes the payoffswill continue.
"We've done extremely well with Tyco," he said.