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 |
|---|---|---|---|---|
| Emerson El. (NYSE:EMR) | 26.5 | 40.7 | 1.9 | 10% |
| Fortune Brands (NYSE:FO) | 18.2 | N/A | 1.7 | 11.7% |
| General Electric (NYSE:GE) | 21.7 | 28.0 | 2.5 | 9.7% |
| Siemens AG (NYSE:SI) | 22.3 | 26.4 | 0.8 | 12% |
| 3M (NYSE:MMM) | 26.2 | 30.2 | 3.4 | 11.4% |
| United Tech. (NYSE:UTX) | 20.4 | N/A | 1.5 | 12.3% |
| Tyco (NYSE:TYC) | 53.5 | 15.6 | 1.4 | 12.8% |
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.
