Will Tyco's (TYC) Q3 Earnings Disappoint On Macro Woes?

Security and protection services provider Tyco International Ltd. (NYSE:TYC) is scheduled to report third-quarter fiscal 2016 results before the opening bell on Jul 29. In the last reported quarter, earnings matched with the Zacks Consensus Estimate. Tyco has a modest earnings surprise history, beating earnings estimates twice in the trailing four quarters with an average positive earnings surprise of 1.95%.

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

Key Factors in the Third Quarter

Tyco’s merger with global diversified technology firm Johnson Controls (NYSE:JCI) is currently on track and is expected to be completed by Sep 2, 2016. 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. Although the transaction is not likely to make any significant contribution in the to-be-reported quarter, its role in attracting potential revenue contribution from other clients is irrefutable.

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.

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. Tyco also expects corporate expense to trend upward. Sustained increase in operating expenses will likely be a drag on the company’s bottom line.

Furthermore, a significant portion of Tyco’s revenues comes from Europe. Presently, when the economy of the region is highly unpredictable post the Brexit referendum, it becomes difficult for the company to increase revenues and reduce costs. In addition, Tyco is likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering productivity of the company.

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 a successful earnings beat. 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 pegged at -1.89%.

Zacks Rank: Tyco’s Zacks Rank #2 when combined with negative ESP makes an earnings beat prediction uncertain. Note that, we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

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

LPL Financial Holdings Inc. (NASDAQ:LPLA) has an Earnings ESP of +2.33% and a Zacks Rank #3.

Federated Investors, Inc. (NYSE:FII) has an Earnings ESP of +2.13% and carries a Zacks Rank #3.

Cullen/Frost Bankers, Inc. (NYSE:CFR) has an Earnings ESP of +0.96% and carries a Zacks Rank #3.