investors, accustomed to wild plot twists by now, are hoping all the high drama remains in the courtroom this week.
Against the backdrop of a high-profile trial -- detailing past corporate excesses in sometimes embarrassing detail -- Tyco is poised to deliver quarterly results that should trigger little unrest. The giant conglomerate is generally expected to hit Wall Street profit targets and possibly even show some modest organic sales growth.
But the company, with more than $32 billion worth of goodwill and intangibles on its books, could also end the year with a big impairment charge. Moreover, some analysts say, Tyco will probably issue lowball guidance -- despite a likely hit to its shares -- in an effort to dodge the negative surprises that dogged the company this year.
Both UBS and Smith Barney, for example, expect Tyco will probably offer 2004 guidance of $1.40 to $1.50 a share that's at least 4 cents below consensus expectations.
"The company had to lower EPS guidance all through 2003, despite consistently surprising on cash flow, and we think management will want to leave enough cushion in its forecast to avoid further downward revisions," Smith Barney analyst Jeffrey Sprague wrote last week. "Guidance in this range could put some near-term pressure on the stock."
Tyco shares fell 49 cents to $20.88 on Friday, ahead of the company's report.
Still, both UBS and Smith Barney recommend buying Tyco shares because they see fundamental improvements coming. UBS analyst David Bleustein expects Tyco to match Wall Street's fourth-quarter profit estimate of 33 cents a share. He also believes improvements in some key Tyco businesses -- electronics, fire protection and health care -- could generate organic revenue growth of up to 3% for the company overall.
However, Sprague is looking for a 1% decline in organic revenues for the latest period. He foresees decent growth in certain areas -- particularly health care and electronics (excluding Tyco's telecom business) -- offset by downturns in engineered products and fire and security. He points to the latter, in fact, as a possible area of concern.
"Engineered products will likely have a tough quarter," he wrote. But "fire and security revenues and margins remain the area of lowest visibility at Tyco, given the legacy accounting and customer quality issues the company has been dealing with."
Accounting in general could hit the company's overall results as well. Both UBS and Smith Barney mentioned a possible impairment charge in reports they published last week.
"Based on current business conditions and outlooks which are arguably weaker relative to the time Tyco completed certain acquisitions, we believe there is a potential for Tyco to report a goodwill impairment charge in the fourth quarter," Bleustein wrote. "Based on our conversations with the investment community, we believe a charge in the $500 million to $2 billion range would not be a surprise to investors."
Sprague has already downplayed the potential impairment hit.
"We continue to hear concerns about the possibility of a goodwill impairment at Tyco," he acknowledged. "Although we certainly cannot rule it out, we believe the likelihood of an impairment that would strain the cushion Tyco has relative to its covenants is remote."
Sprague pointed out that Tyco's recent debt-to-capital ratio, at 44.3%, is well below the 52.5% maximum allowed. Moreover, he said the company has "pooled" its assets together -- diluting the goodwill across entire entities -- in such a way that big impairment charges are unlikely.
"Of course," he admitted, "this conclusion rests on the assumption that the
Securities and Exchange Commission will challenge none of Tyco's poolings."
Clearly, Sprague is counting on better.
"While Tyco cannot declare complete closure with the SEC, we believe year-to-date charges address the major outstanding issues and any further charges, if necessary, would be immaterial to Tyco," he wrote. "Although we still have concerns that damaging revelations could be revealed by the SEC's enforcement division, the recent conclusion of the SEC's corporate finance review may suggest that the worst is behind Tyco."
In the meantime, Sprague has adopted an upbeat tone about the company's future.
the fourth quarter should be Tyco's first up quarter on a year-over-year basis in six quarters," he wrote. "We believe earnings have turned the quarter and will be on a steady upward track from here."