| Standing Down |
Tracing Tyco's 2002 slide
Wall Street analysts have done little to protect investors from Tyco's ( TYC) fall. Buffetted by concerns, first, that the company's accounting was too aggressive, and then that its liquidity was drying up, shares of the Bermuda-based conglomerate have fallen around 50% this year. Yet throughout that decline, most Wall Street analysts have done little but coo about what a great company Tyco is. At the end of 2001, Tyco was the 15th-highest-ranked of the roughly 3,800 stocks with five or more analysts covering them, according to Thomson Financial/First Call. In the latest tally, taken Monday, the conglomerate had slipped all the way to the 21st spot. Only one of the 14 analysts covering the stock has downgraded Tyco this year. On Tuesday, Legg Mason's Barry Banister changed his view on the company to a market performance rating from a strong buy. In doing so, however, he made it clear that he still believed that Tyco was a great company whose stock was trading well below its fair value. The rumormongers had taken control of the stock, he said, and so he would wait for the smoke to clear. As Tyco skidded, some bullish analysts decided the stock wasn't worth as much as they used to think -- which isn't to say they don't think you should buy Tyco right now. J.P. Morgan's Don MacDougall on Wednesday lowered his target price on Tyco to $65 from $80 "to reflect lower earnings and more modest valuation assumptions." But the new target represented a more than 100% upside from the current price, he noted. ABN Amro's Wendy Caplan has had a $71 target on the stock, but in her note on Tuesday she was saying instead that she believed Tyco's value "could exceed $50 per share." In MacDougall and Caplan's defense (neither was immediately available for comment), they're in a tough fix -- the only thing that would be worse than being wrong-footed on Tyco on the way down would be to subsequently tell clients to sell and then see the thing run higher. But if they made it patently clear they'd erred, they'd get more respect.
"We all get a case of the wrongs sometimes," says Salomon Smith Barney strategist John Manley. "The less time you spend denying your wrongness, the better off it's going to be for everybody." For Manley, the key question is whether the reason you liked the stock so much in the first place is still there. If it isn't, you need to reassess. As it is, the unremittant bullishness of the Tyco analysts has destroyed their credibility, says Todd Clark, managing director of listed trading at Wells Fargo Securities. Particularly in these times. Investors remember how keen the analysts were on Enron as it slumped, too. "They fought that all the way down, too," says Clark, "until it was too late to get out." Clark thinks the Enron comparisons on Tyco go too far, but the point is that nobody is going to take Wall Street's Tyco bulls seriously anymore. Perhaps at this moment they are right -- the company is unfairly maligned and extremely undervalued. Who will listen?
The analyst who has been most cautious on Tyco is Prudential's Nick Heymann, who has a hold rating on the stock. When Tyco announced its plan to split itself into four while selling off some assets, and most of the sell side gushed about how the plan was going to be great for shareholders, he wrote that it seemed "less likely to unlock hidden shareholder value than appease debt holders." Heymann's history probably has something to do with his caution -- he was last bull out on Sunbeam ( SOC) when accounting concerns damaged its stock badly in the spring of 1998. His concerns on Tyco -- along with an outright sell rating on Whirlpool ( WHR), whose stock lately has tumbled badly -- may have gone some way toward erasing the blot from his reputation. But there is another difference between Heymann and most of the other Tyco analysts, and that is where he works. Prudential isn't a big name in investment banking. It doesn't do huge initial public offering or bond syndicate business. Which is to say that it hasn't pulled down scads of money doing work for Tyco; a lot of other firms have. (Also note that Legg Mason -- the firm that dropped Tyco to a hold -- also isn't heavily involved in banking.) Tyco has been a good source of revenue for Wall Street. It makes billions of dollars in acquisitions every year. About $20 billion in Tyco bonds are on the market, making it the 15th-largest issuer, according to Lehman Brothers. Its plan to split itself into pieces over the next year will add even more cash to firms' coffers. It is a dry time on Wall Street, and Tyco's business is a cool glass of water.