The March issue of SECURITY SALES & INTEGRATION includes my exclusive and in-depth with interview with Mike Ryan, president of Tyco Security Products (TSP) and Life Safety Products. To offer a balanced perspective, I turned to a couple of trusted industry analysts. First up is an excerpt from a recent analysis produced by Imperial Capital, whose managing director, Jeff Kessler, is a frequent SSI source. That information sets up a short Q&A I conducted with Bill Bozeman, president and CEO of PSA Security Network and also a member of the SSI Editorial Advisory Board. Be sure to also check out the bonus blog Q&A post from my lengthy discussion with Ryan.
Imperial Capital Tyco Int’l Analysis:
Tyco Int’l (TYC) generated revenue of $10.7B, EBITDA of $1.6M, and adjusted EPS of $1.90 during the latest 12-month (LTM) period ended 12/27/13. The company had $479M in cash as of that date, and total net debt of $1.6B.
We are maintaining our Outperform rating and raising our one-year price target to $45 from $37, which is about 11.1% above the recent share price. Management is focused on amplifying service-based revenues, engaging client management to focus on business process enhancement, growing the percentage of higher-margin service revenues in the total mix, and has demonstrated seriousness towards being selective about what jobs the company accepts, beginning with its North American Systems Installation & Services (NA I&S) division, in our view.
Potential Earnings Momentum in 2H14. We continue to believe that a majority (about 54%) of FY14 EPS will be achieved in 2H14. After the company’s integration of its fire services and products with those of the former ADT Commercial services and products into a more cohesive operation in 2014, we believe these factors may become significant drivers of the stock.
Our one-year price target is based on 12.2x our EBITDA estimate for FY15, without accounting for the pension liabilities. With the pension liabilities included, our one-year price target is based on 12.6x our EBITDA estimate for FY15. This multiple is placed between that of Allegion (ALLE) and of Assa Abloy (ASSA’B), of which it is 130bp lower than. After the company’s integration of its fire services and products with those of the former ADT Commercial services and products into a more cohesive operation in 2014, we believe these factors may become significant drivers of the stock.
Summary of 1Q14 Results — Global Products
Revenue within the segment was reported at $565M (up from $534M during 1Q13), while operating income was $90M (up from 1Q13), resulting in a reported operating margin of 15.9% (up from 15.5%). The company noted that overall orders within this sector grew by 7.5% yoy, and organic revenue was up 2%. Additionally, strategic acquisition contributed 4% to the overall growth within this segment.
Q&A With Bill Bozeman:
What have been the pluses of Tyco Security Products recently being split off into its own separate Tyco business? Any negatives?
Bill Bozeman: We see more positives than negatives. Now that the dust has settled we are seeing a more focused company on the manufacturing side. The spinoff also helped with channel conflict. It did not eliminate all concerns but certainly made things better.
What do you see as Tyco’s leading strengths in the marketplace that gives the business an edge over some competitors? Any weaknesses?
Bozeman: They have a strong base with AD [American Dynamics] and SWH [Software House]. With the addition of Exacq, they have a nice package with an experienced team behind them
Which specific brands within its portfolio (e.g. American Dynamics, Software House, DSC, Sur-Gard, Exacq, Visonic) do you see as being the best positioned for growth, why? Which brands, if any, may face a struggle?
Bozeman: The integration of AD and Exacq has very interesting potential as they will have the firepower to compete with
Avigilon and others who have end-to-end solutions, while unlike Avigilon keep an open model as well.
Were you surprised Tyco Security Products purchased Exacq Technologies, why or why not? You see the business consolidating more manufacturers?
Bozeman: Consolidation in our business is not stopping and nothing surprises me. The key to consolidation is having a plan and a mindset to work the consolidation to the best interest of your company. PSA has such a plan and it has worked for us in the past and it continues to work.
With such an established legacy of product lines, is it difficult for Tyco Security Products to keep up with technology? Is the company maximizing its R&D and synergies across brands?
Bozeman: Only the executives at Tyco Security Products know if they have the budget to keep up with technology, but having a separate company that focuses on manufacturing security products would put them in a better position than one of several divisions all fighting for budget dollars. They also have the capability to acquire technology as shown by the recent Exacq acquisition.
Any other observations?
Bozeman: My guess is we will see a more aggressive Tyco as compared to the past several years.