UPDATE: Credit Suisse Upgrades Tyco, Expecting a Big Boost for Incremental Margins in the Installation and Service Businesses
In a report published Monday, Credit Suisse analyst Julian Mitchell upgraded Tyco International (NYSE: TYC) from Neutral to Outperform, raising its price target from $36.00 to $46.00.
According to the report, TYC's top-line growth is set to accelerate from commercial construction tailwinds.Its earning should also benefit from an aggressive cost-cutting program as well as higher incremental margins from better-quality backlog in N. America.
“Stricter project selectivity standards should boost incremental margins in the installation and service businesses (75% of sales) above historic levels,” the report said. “This, coupled with a cost-cutting program which is running ahead of the initial plan (and will now be augmented by the Branch in a Box efforts), should drive EBIT growth rates to ~500bps above the sector average, at ~15% annually. Our forecasts embed ~$120mn cost savings over FY14-15, and ~25% blended incremental margins.”
Some highlights from the report included:
-”50% of TYC sales accrue from US non-residential construction.” -”We think FCF deployment could add $0.14 to our 2015 estimates, and levering the balance sheet to 1.5x (from ~1.0x today) could add an additional $0.20, implying potential earnings power of $2.80+.” -”TYC trades on a 2015 PE/G ratio of ~1.0X, which renders it one of the cheapest large-cap EE/MI stocks.”
TYC closed Friday at $40.44.
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