Tyco Electronics (NYSE:TEL) is finally beginning to catch the attention of value investors after its rough start as a public company. The Tyco spinoff is trading well off of its initial offering price, continues to be valued below its peers, and has only one analyst recommending a buy. So, why is Tyco Electronics a stock worth watching? Let's take a look...
Tyco Electronics shares are currently trading around 10% below its initial offering at around $36.50. The stock is trading at around 16x forward earnings compared to an industry average 21x, which means it is trading at a discount to its peers. This is despite a healthy cash flow with a 6% free cash flow yield. So fundamentally, this company is relatively healthy and trading at a discount to its peers.
Tyco Electronics has also seen some significant insider buying this month. Thomas Lynch purchased almost $680,000 worth of stock on August 13th while two other insiders purchased an addition $110,000 worth of stock shortly afterwards. Meanwhile the company has seen no insider selling, which indicates that insiders are confident in future prospects.
Finally, Tyco Electronics is unique in that it is a spinoff company, which have historically outperformed the overall stock market. A Thompson Financial study of spinoffs dating back to 1996 found that the average spinoff company fell during the first month but recovered to an 8% gain after six months and a 12% gain after twelve months. These returns are far in excess of average stocks!
This tendency is attributed to the fact that parent company shareholders often do not want shares in the new company and sell their shares. This unjustified selling pressure pushes down share prices despite decent fundamentals, which creates buying opportunities in the early months after a spinoff. Tyco Electronics is no different; however, the current market conditions have pushed this move even lower despite decent fundamentals. And this has created a great value play that investors are just now starting to notice!
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$36.17 (08/27/07)
