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Fitch Ratings, a global credit rating firm, has reaffirmed the credit rating of A- for security and protection services provider Tyco International Ltd. (TYC - Analyst Report). The A-rating denotes a stable outlook with a relatively strong credit quality, low default risk and adequate capacity to meet current financial commitments.

While reiterating its long-term debt ratings, Fitch has considered Tyco’s strong market position in its fire and security sectors, geographic diversification and low leverage with a Debt/EBITDA of 1.0x (as of Jun 28, 2013). In addition, Fitch expects an improved operating performance by Tyco in the impending quarters, following its separation from ADT and Flow businesses at the end of fiscal 2012 to focus entirely on fire and security operations as a standalone business.

Furthermore, Fitch observed that about 30% of Tyco’s revenues are recurring in nature, which offsets the volatility in the installation business. The company is currently focusing on expanding in emerging markets, while selectively growing its business in high-margin products. Although margins are expected to be weak due to business restructuring, Fitch anticipates operating margins to increase by 150-200 bps in the long-term.

Free cash flow is expected to be about $500 million in 2013. Fitch expects Tyco to have adequate liquidity to fund share repurchases and acquisitions. For full year 2013, acquisitions are expected to aggregate $225 million as Tyco remains focused on inorganic growth as a primary growth driver.   

We remain bullish on Tyco’s fortunes based on the relative stability of the global security markets as well as high and predictable cash generation, limited balance sheet risk and easy cost-out opportunities. The company’s solid balance sheet and healthy liquidity position are also potential catalysts to continuously fund organic and inorganic growth initiatives and maximize return for its shareholders.  

Tyco provides latest fire protection and security products and services to more than three million customers across the globe. The company has more than 70,000 employees in over 1,000 locations across 50 countries, serving various end markets, including commercial, institutional, governmental, retail, industrial and energy, residential and small businesses.

Tyco currently has a Zacks Rank #3 (Hold). Other stocks in the industry that look promising and are worth considering include Hutchison Whampoa Ltd. (HUWHY) with a Zacks Rank #1 (Strong Buy), ITT Corporation (ITT - Analyst Report) and Magna International Inc. (MGA - Analyst Report), both carrying a Zacks Rank #2 (Buy).

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