These Neglected Stocks Hold Super Potential

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

This is my second report on the electrical equipment players. In my last report, I mentioned how this sector has been neglected and that it holds potential upside in case the Chinese economy re-accelerates. In this post, I have mentioned another three players, their earnings review and their 2013 outlooks with a special focus on M&A activity.


1Q: The company is expected to announce an EPS of 43 cents and a quarterly revenue of $817 million in its Jan. 30 earnings release.

M&A Activity: ADT’s M&A spend is expected to exceed their budgeted $150 million in 2013. This spending will drive revenue and earnings growth above the current market expectations. The fragmented security monitoring industry is filled with potential targets for ADT, and given most industry competitors operate near identical business models, most M&A should offer significant cost synergies and earnings accretion. Adding an additional half turn of EBITDA leverage to ADT’s current targets would give them $700 million to spend on M&A; this could mean $175 million in incremental EBITDA before synergies (10%+ accretive).

Proxy filing: Despite ADT’s management encouraging investors on the 4Q earnings call to look at steady state Free Cash Flows (SSFCF) as a stronger indicator of the cash generative power of the business than FCF, the street feels that the metric is still under-appreciated by investors. When ADT’s proxy is filed and management compensation incentives become public, this will give investors a better idea of what truly drives value at the company (RMR, EBITDA, SSFCF) (RMR is recurring monthly revenue) which should help the valuations.

Execution: At the end of the day, the Street has faith in the ADT management team and their ability to execute going forward.

Danaher Corp (NYSE: DHR)

4Q: Danaher pre-announced Q4 organic sales growth was +3% vs +1% guidance on a YoY basis. The EPS is likely to come in a couple of cents above the $0.80-0.85 guidance range. It appears that the growth pick-up was broad based, with T&M and Life Sciences accelerating to +2.5% / 5% y-o-y, against -6.5% / 2.5% in Q3 respectively.

2013 Outlook: Given the pre-announcement, I believe the guidance will likely be up slightly and raise the Street’s estimates by approximately $0.05. An organic growth acceleration is now likely priced in to the stock. The key area of investor focus for now is M&A (expectations of a large imminent deal are high), and the shares are not expected to move meaningfully off the earnings given the recent pre-announcement.

Tyco (NYSE: TYC)

1Q: Tyco is expected to at least hit its $0.39 EPS guidance for Q1, with organic sales growth likely to remain very muted given the weakness in the Rest-of-the-World (RoW) Systems installation business, offset by a decent margin expansion y-o-y and q-o-q. The earnings release date is Jan. 29.

2013 Outlook: We expect the company will reiterate its FY13 EPS guidance of $1.75-1.85, with strong margin growth and low single digit sales growth. Shares are unlikely to react much to the earnings release, and I believe they have already factored in some top-line improvement (from the recovery in the commercial construction sector) and a margin expansion towards the mid-teens.

Foolish Bottom-Line

The electrical equipment industry has a lot of potential to grow given the immense amount of M&A opportunities in the industry that can lead to significant cost synergies. 

AnalystX has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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