JP Morgan Upgrades Tyco To Overweight

• Shares of Tyco International PLC TYC have declined 16.28 percent year-to-date, from a high of $43.99 on January 8.
• JP Morgan’s C. Stephen Tusa, Jr has upgraded the rating on the company from Neutral to Overweight, while raising the price target from $40 to $42.
• Tusa believes that the company’s current multiple neither reflects the safety offered by its portfolio, nor the visibility into its revenue acceleration potential.

Analyst C. Stephen Tusa, Jr explained that “Tyco could be close to a period of organic outperformance as soon as this quarter, not abnormal in a period of weaker sector growth and more visible than many that are banking on merely better comps.”

Tusa elaborated further that the only time that the company has outperformed in the past 10 years was in 2009, which reflected “uncommon visibility/safety.” With meaningful restructuring on the cards, Tusa also believes that the company would be able to drive EPS growth of 8 percent during 2015-2017, despite management’s concerns regarding margin expansion.

However, according to the JP Morgan report, Tyco’s balance sheet is “not as clean as many expected a year ago, but we see above average optionality, a potential ~$0.25 of “hedge” or upside, and expect visibility to improve on deployment with the ultimate passing of the IRS issue.”

This could prove to be a catalyst over the next 12 months. The stock is currently trading at an adjusted 5-10 percent discount, “in line with impaired commodity exposed names,” Tusa said, while expecting the valuation to return to a 10 percent premium, which would reflect the “visible acceleration” better.