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Will Tyco (TYC) Q2 Earnings Surprise on Portfolio Reshuffle?

Security and protection services provider Tyco International Ltd. TYC is scheduled to report second-quarter fiscal 2016 results before the opening bell on Apr 29. In the last reported quarter, earnings beat the Zacks Consensus Estimate by a penny. In the trailing four quarters, the company has beaten earnings estimates three times with an average positive earnings surprise of 4.45%.

Let’s see how things are shaping up for this announcement.

Key Factors in the Second Quarter

Tyco is repositioning its portfolio to ensure the right mix of businesses and maximize long-term value for its shareholders. At the same time, Tyco is building on its Internet of Things capabilities with proven expertise in its Installation and Services businesses. It has installed more than one billion fire security and retail sensors and devices globally. These capabilities enable Tyco to offer new intelligent services for customers ranging from Fortune 500 companies to small businesses.

During second-quarter fiscal 2016, Tyco signed a merger deal with the global diversified technology company, Johnson Controls. Per the deal, Tyco will own 44% equity in the joint company. Post merger, the companies plan to strengthen their building products and technology, integrated solutions and energy storage portfolios. Tyco believes that this acquisition will help it to expand its global footprint in the building-technology market, enhance shareholder value and launch innovative solutions.

Tyco moved into its new global headquarters and business service center at One Albert Quay in Cork, Ireland during the fiscal second quarter. This strategic move will help the company to deliver improved processes for its widespread businesses, while achieving synergies across all levels of operations, including sourcing and procurement, customer service, research and development, information technology and finance.

However, Tyco’s business strategy hinges on acquiring companies and making investments that complement its existing businesses. These acquisitions and investments consume significant resources and entail huge integration costs, which could adversely affect its operating results. Also, foreign exchange headwinds due to a strengthening U.S. dollar might prove to be headwinds for the company in the fiscal second quarter.

The company’s growth is dependent on its ability to adapt its products and services to meet local market demand in both developed and emerging economies. This involves developing or acquiring new technologies that achieve market acceptance within reasonable margins. The company expects corporate expense to be on an upward curve. Sustained increase in operating expenses would be a drag on the company’s bottom line.

Tyco expects second-quarter fiscal 2016 earnings per share before special items in the range of 44–46 cents.

Earnings Whispers

Our proven model does not conclusively show that Tyco is likely to beat earnings this quarter as it lacks the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently at 0.00%.

Zacks Rank: Tyco’s Zacks Rank #3 when combined with a 0.00% ESP makes an earnings beat prediction uncertain. On the other hand, the Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Arch Capital Group Ltd. ACGL, earnings ESP of +1.77% and a Zacks Rank #2.

Boyd Gaming Corp. BYD, earnings ESP of +36.00% and a Zacks Rank #1.

Anixter International Inc. AXE, earnings ESP of +13.58% and a Zacks Rank #2.

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