Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
Tyco International (TYC)
Jim: Every time I hear this outfit's name, I think of toy trains.
Mike: So do I. But instead Tyco is in a lot of other fields, and when people on Wall Street hear its name these days, what comes to mind is Cendant Corp.
Jim: In other words, not toy trains but a train wreck.
Mike: Exactly. Cendant, of course, is a company we discussed a while back that had terrible accounting problems after it made an acquisition, which sent its stock into a nose dive. Now Tyco has run into the same mess.
Jim: First, let's go over Tyco's operations. This is today's version of Teledyne and LTV of days gone by--that is, it's built itself into a conglomerate of decidedly unsexy businesses by going on a spree of acquisitions. It's in disposable medical supplies, fire alarms, pipes, adhesive products, electronic parts. You get the idea. And altogether they generate about $22 billion in annual sales.
Mike: Right. But though all those lines look unsexy on the surface, once you stripped off the bikini, it used to be Tyco looked pretty good as an investment. From '95 through '98, Tyco's stock rose nearly sevenfold, which of course far outpaced the rise of the general stock market.
Jim: Then the wheels came off, to mix our metaphors even more.
Mike: Right. In the second half of '99, the short-sellers--those icy-nerved people who bet on stocks' going down in price--swooped in and started saying bad things about Tyco's accounting.
Jim: Imagine--short-sellers bad-mouthing a stock.
Mike: Well, it was enough to knock the stuffing out of the stock. And a month or two later, it got even worse after the Securities and Exchange Commission said it, too, was taking an informal look at Tyco's accounting.
Jim: So now what we have is a stock that's tumbled more than 30% since early October, to the mid-$30s, which is only 17 times Tyco's expected earnings per share for its fiscal year ending this September.
Mike: In the meantime, this SEC inquiry isn't expected to be finished until April at the earliest.
Jim: And we won't hear about its decision from the agency itself; Tyco probably will announce what, if anything, the SEC found out.
Mike: True. But we should note that Tyco itself voluntarily announced the SEC's inquiry, and investors took that as a sign that the company has nothing to hide.
Jim: Yeah, I know. And those same bulls are saying that now is the time to buy Tyco, because its beaten-down stock is selling for such a cheap price.
Mike: And sure enough, the stock has bounced up a bit in recent weeks. So would you buy it?
Jim: I'd like to, because Tyco remains a profitable, robust enterprise. It generates lots of free cash flow, is not terribly debt-heavy and the price is cheap.
Mike: But . . . .
Jim: But I'm sorry, this accounting cloud bothers me a lot. We've seen it too many times where a cloud like this just never seems to dissipate, and so I'm afraid Tyco's stock will remain under pressure until it does. So I'd avoid the stock. And as Exhibit A of my case, I offer Cendant.
Mike: Fair enough. And I'd agree with everything you just said, Jim, except for the "but."
Jim: What? You'd buy this stock?
Mike: I agree this accounting cloud will hang around for another quarter at least. But in time I see it going away and that the SEC at worst will ask Tyco to restate its earnings going back a year or whatever.
Jim: Which could whack the stock some more.
Mike: Not really. It will be a nominal setback, and I think investors don't see Tyco as another Cendant by a long shot. Come on: At Cendant there were serious irregularities, and I don't think that's the case here.
Jim: But we don't know that yet.
Mike: Remember, the accounting fiasco at Cendant came from a company Cendant inherited through a merger. The problems showed that Cendant's management wasn't on the ball in terms of knowing what it was buying. At Tyco, we're talking about whether current management has done some things that were riding too close to the line. I don't believe they crossed it.
Jim: I get the distinction, but so what? Too many times I've seen these accounting snags crop up and, despite the company's protestations of innocence, another shoe eventually drops.
Mike: Well, six months from now, the day of reckoning will probably be behind us.
Jim: Fine, and six months from now I'll be happy to revisit whether Tyco is a buy.
Mike: But by then it might be too late, because the big profit will have passed you by.
Jim: Like a freight train in the night?
Global Crossing (GBLX)
Jim: Up next is a company called Global Crossing. Would you care to tell us, Mike, what this company does?
Mike: Sure. But let me preface my remarks by just asking, "Do you believe?"
Jim: In what?
Mike: In the new world, in the thing, the big stuff.
Jim: You're talking about the brave new wired world. Yeah, I do. I'm a believer.
Mike: In the global.
