Industrial conglomerate Tyco reported strong first-quarter earnings this morning, as the turnaround continues from the mistakes and abuses of the Dennis Kozlowski era.
Revenue rose 9% year over year to $9.7 billion, with every segment posting revenue increases (though foreign exchange provided an overall 7% boost). Operating income jumped 18%, and free cash flow moved up a dandy 23%. In addition, the company paid down $2 billion of its more than $18 billion in debt.
The stock price is up about 70% over the past year, but many feel it is still undervalued as the market takes off points for a scandalous past and that heavy debt load. To get a quick look at its valuation, I sorted out six other large companies classified as "conglomerates" and compared their metrics to Tyco's.
It's interesting that all of the long-term growth estimates are in the same 10% to 13% ballpark, meaning the multiples compare fairly well without adjustments:
|Company||P/E ratio||P/FCF ratio||P/Sales ratio||Est. 5-yr. EPS growth|
Tyco's P/E ratio is certainly higher than any of the others, but restructuring and non-cash charges have skewed it. As usual, it's more useful to look at the price-to-free cash flow (P/FCF) ratio. There you see the company measures up quite well, with investors assigning it a much lower multiple compared to the rest.
As Tyco continues to execute well, distance itself from Kozlowski, and pay down debt, perhaps Mr. Market will begin rewarding it with a P/FCF multiple more in line with its peers.