Tyco Pulls a Brink's Job, Stock Looks Like a Steal

Shares in Tyco International (TYC) looked intriguing even before Tuesday's news the company would make its first major acquisition in eight years. But now that it intends to buy Brink's Home Security (CFL), also known as Broadview Security, in a $2 billion deal that makes sense both strategically and financially, the stock appears too undervalued to ignore.Tyco, based in Schaffhausen, Switzerland, has five businesses, but its ADT Worldwide security unit is the biggest revenue producer, generating $7 billion in sales last year out of $17 billion in total. At the same time, the North American small-business and residential security industry remains highly fragmented. Indeed, ADT leads all players with just 22% share of the market.

That's where Brink's comes in. Add that company's 1.3 million subscribers to ADT's 7 million and Tyco is poised to grab another four percentage points of the North American market -- big enough to boost the bottom line, but not so much as to warrant anti-trust concerns in the U.S.

"There is clear strategic logic underpinning the deal, but...there is also clear financial logic," wrote Deutsche Bank analyst Nigel Coe, who rates shares at buy. "Strategically this plays directly into Tyco's wheel-house, increasing its U.S. residential and small-business account base from 4.8 million to 6.1million but the resultant 4% to 5% increase in market share to about 20% means that anti-trust concerns are likely to be modest."

Furthermore, the deal not only expands ADT's home security business, but it'll also enjoy recurring revenue from Brink's existing contracts at private residences, commercial buildings, airports and ports. The deal, expected to close in the second half of the year, is forecast to add at least 7 cents a share to earnings within 12 months of completion (excluding integration and acquisition costs) and at least 14 cents a share in the second full year after close.

The market usually sells shares in an acquiring company whenever a deal is announced, but Tyco's better-than-expected preliminary fiscal first-quarter results (also disclosed Tuesday) gave the stock a lift. Happily, Tyco still look compellingly valued even after the recent action, not to mention a nearly 65% rally over the past 52 weeks.

Shares go for less than 13 times forward earnings, putting them at about a 20% discount to the S&P 500 ($INX) and a 12% discount to their own five-year average, according to Thomson Reuters. (The stock trades at nearly a 30% discount to the broader market on a trailing earnings basis, but at only a slight discount to its own five-year average.)

Perhaps most interesting is the price-earnings-to-growth (PEG) ratio, which measure how fast a stock is rising relative to its growth prospects. Even after beating the S&P by nearly 20 percentage points over the last 52 weeks, Tyco's PEG of 0.9 still offers a discount of more than 50% to the broader market, according to Thomson Reuters. (It trades at a more modest 5% discount to its own five-year average, so don't get too excited.)

Still, analysts average price target stands at $41.67. Throw in the solid dividend, currently yielding 2.1%, and you get an expected return of about 11.5% in the next 12 months or so.
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