Tyco ( TYC) is back to starring in its own reality show.

A week after dazzling Wall Street with beautiful cash flow -- in one of the company's most colorful performances to date -- Tyco began to falter as the black-and-white truth set in. The company's second-quarter rebound, which looked so strong on the surface, could be fleeting. Meanwhile, the serious challenges upstaged by last week's good news will probably linger for a while.

The market, sobering up after last week's party, took a breather from its applause. After rallying for a 15% gain on the recent earnings report, the stock gave back nearly 4% to close Monday at $16.13. Although the stock bounced to $16.50 on Tuesday, at least one analyst -- one who has withheld rave reviews for Tyco for some time -- believes the stock could easily drift lower before investors have anything meaningful to clap about.

Prudential's Nicholas Heymann warns that Tyco must resolve serious issues -- with the Securities and Exchange Commission, the Internal Revenue Service and its own disgruntled shareholders -- before the company's stock can begin to recover. He's not even terribly uplifted by Tyco's second-quarter numbers, which tend to lose some of their luster under a strong spotlight.

Short-sellers pounced on the same numbers, hurt by a fresh wave of charges, and saw continued signs of weakness. They are convinced that Tyco faces long-term challenges that will stick around even after the company's massive accounting headaches finally subside.

"They've milked all of these businesses," one short-seller said. "They're just not competitive like they used to be."

After reviewing Tyco's latest earnings report, Heymann also declared that "operating challenges remain throughout the business portfolio." He questioned the sustainability of Tyco's bursting cash flow and, in the end, concluded that Tyco must shed entire business units and fatten its dividend before the stock can start to look attractive again.

Built to Last?

Tyco's second-quarter cash flow loomed large as the star of last week's news.

Coming in at $833 million -- even under a newly conservative definition -- cash flow jumped 47% from a year ago and nearly doubled some estimates of the crucial measure. To its credit, Tyco took on some big challenges to achieve that boost in cash. Namely, it cut inventories and receivables by $400 million and capital spending by $138 million during the quarter. But some critics view these as one-time improvements that simply distort the company's true cash-generation power.

Heymann pointed out that Tyco needed $512 million worth of "unsustainable" cutbacks to grow second-quarter cash flow by $265 million. And he went on to conclude that Tyco's sustainable cash flow from operations "appeared to have significantly declined" from past levels during the quarter.

For now, most investors are focusing on Tyco's cash flow instead of its earnings per share as a measure of the company's health. Excluding special charges, Tyco actually hit quarterly profit targets of 32 cents a share. But its businesses are clearly struggling.

Of the company's five core divisions, only health care showed overall improvement during the period. Meanwhile, Tyco's problem-riddled ADT business brought a new pile of charges that pushed the fire and safety division -- and indeed the entire company -- squarely into the red. All together, Tyco took $1.4 billion worth of charges that wiped out a quarterly profit and left the company with a loss of 23 cents a share.

Despite grumbling from critics, Tyco CEO Ed Breen continues to defend a high-profile forensic audit that failed to detect the latest mistakes and declared the company fraud-free just ahead of a crucial securities offering. Moreover, Breen considers the giant charges too minor to require financial restatements.

"Because the on-site verifications have resulted in minimal changes to our initial work, we take this as an indication that the initial review process was thorough and accurate," Breen told investors during a conference call last week. "We believe the charges ... are not quantitatively or qualitatively material either individually or in aggregate to any prior period and, therefore, do not require restatement of previously disclosed operating results."

Agreeing to Disagree

But Heymann is among a large crowd that disagrees with that assessment.

"Reaching a final SEC accord may very well necessitate a full, retrospective restatement of the company's past highly inflated reported results," he said.

Tyco hopes to put the SEC investigation behind it by the end of the year. But even if it succeeds, the company could still be facing a huge payment to the IRS and a potentially dilutive settlement with unhappy shareholders before its biggest headaches are really over.

To raise money for future obligations, Tyco plans to shed as much as 10% of its asset base. But Heyman sees Tyco selling off far more. In fact, he believes the company is already preparing to shop out its biggest problem child -- ADT -- to potential new parents.

"In our opinion, this was the primary reason the company 'accelerated' its accounting review and rapidly moved to adjust ADT's accounting now rather than later this year," Heymann wrote last week. "In so doing, the company should be able to report modestly improved earnings over the next two quarters, thus enhancing the visibility of ADT's sustainable earnings" prior to any hike in interest rates and sale to an interested buyer.

Heymann also believes the company's plastics division -- which failed to find a buyer once -- may be headed back to the auction block. During the latest quarter, the division relied on a foreign currency benefit to boost revenue, and because of restructuring charges, it still came up short on operating profits.

Engineered products and services weathered declines in both revenue and profits during the latest quarter. And even electronics, which increased quarterly profits, showed some weakness. The division's revenue stayed flat, despite help from currency gains and acquisitions, while its profit margins declined.

Bend, Fold and Dwindle

Noted short-seller David Tice has long insisted that Tyco overpaid for subpar companies that have only dwindled in value under the Tyco umbrella. Other critics agree. As evidence, another short-seller pointed to an alleged slowdown in innovation at the company once known as Raychem. Since its acquisition by Tyco, the short-seller said, Raychem's patent applications have plummeted from four or five dozen to just four or five -- period -- annually.

Heymann, the only mainstream analyst who's cautious on Tyco, believes the company will ultimately conclude that it must invest huge sums in research and development to fuel long-term growth in most of its businesses. But until Tyco has the cash to invest in its future -- and to hike its dividend by more than tenfold -- he expects the stock to tread water around the $15 range.

At least one short-seller marveled that investors would pick up Tyco's stock right now at any price.

"How can people go long on this stock?" he asked. "You can't really tell what you have."