Can Tyco International (TYC) Surprise This Earnings Season?


Security and protection services provider Tyco International Ltd. (TYC) is set to report second-quarter 2014 results before the market opens on Jul 25.

In the preceding quarter, Tyco delivered a positive earnings surprise of 12.50%. On an average, the company has posted a 4.81% positive surprise in the trailing four quarters. Let’s see how things are shaping up for this quarter.

Factors to Consider This Quarter

With continued improvement in its service and products revenue, supported by a rise in installation proceeds, Tyco expects to witness top-line growth. The company enjoys a relative stability in the global security and fire markets with a predictable cash generation, limited balance-sheet risk and easy cost-out opportunities.

During the quarter, Tyco completed the sale of its South Korean security business to The Carlyle Group LP, an asset management company, for $1.93 billion in cash. Also, the company sold the residual interest in its former electrical and metal products business, Atkore International, in a cash deal valued at around $250 million.

This strategic repositioning is aimed at improving the business mix of the company and generating additional value. These divested units generated over $2 billion in total deployable cash, which the company can employ in pursuing lucrative opportunities. However, the divestments are likely to create an immediate negative impact in the upcoming quarters.

Tyco, now a pure Fire & Security company, boasts an attractive acquisition pipeline. Last year, it acquired Westfire, Inc., a leading fire installation and services business in the mining and special hazard verticals in the U.S., Chile and Peru. The acquisition, expected to produce approximately $80 million in 2014 revenues, will favorably impact the company’s performance in the coming quarters.

Earnings Whispers
Our proven model does not conclusively show that Tyco is likely to beat earnings this quarter as it does not have the right combination of two key ingredients for a likely beat. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, #2 or #3 for this to happen. That is not the case here as you will see below.

Zacks ESP: Expected Surprise Prediction, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate currently stand at 54 cents.

Zacks Rank: Tyco has a Zacks Rank #4 (Sell). We caution against Sell rated stocks (#4 and #5) going into an earnings announcement. When combined with 0.00% ESP, the Zacks Rank #4 fails to conclusively predict an earnings surprise. Rather, the probability of an earnings miss in the soon-to-be-reported quarter is comparatively higher.
Other Stocks to Consider

Here are other companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this season:

Kirby Corporation (KEX), with Earnings ESP of +3.08% and a Zacks Rank #1 (Strong Buy).

Hospira Inc. (HSP), with Earnings ESP of +1.79% and a Zacks Rank #1.

Silicon Motion Technology Corp. (SIMO), with Earnings ESP of +33.33% and a Zacks Rank #1.

Read the Full Research Report on HSP
Read the Full Research Report on TYC
Read the Full Research Report on SIMO
Read the Full Research Report on KEX

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