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All Contents © 2017The Kiplinger Washington Editors
By Will Ashworth
| October 2017
As we currently make our way through October and the beginning of the new television season, the Big Bang Theory spinoff Young Sheldon is getting solid reviews, providing evidence that even in television, spinoffs can work wonders.
“The facts are overwhelming,” wrote Joel Greenblatt in his 1998 book You Too Can Be a Stock Market Genius. “Stocks of spinoff companies, and even shares of the parent companies that do the spinning off, significantly and consistently outperform the market averages.”
Back in July, I discussed seven stocks that had huge spinoff potential, which included Costco Wholesale Corporation (COST) spinning off its Canadian operations, the most successful of its international operations.
The July piece was suggestive in nature; it’s likely that some, if not all of them, won’t see the light of day.
This article is backward looking in that I’ll take seven spinoffs that have occurred over the past 12 months and decide in all seven situations whether the parent or the spinoff is the better stock to own for the next three-to-five years.
Prices and data are from the original InvestorPlace story published on October 12, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
You would have thought Brighthouse Financial Inc. (BHF) would have got an immediate boost when it was added to the S&P 500, replacing AutoNation, Inc. (AN) in August as a result of its spinoff from parent Metlife Inc. (MET). Unfortunately, that’s not what happened; BHF is down 1.5% in the two months since the spinoff, compared to a 9% gain for MET.
Brighthouse is Metlife’s former U.S. retail business. In its second-quarter report that came out Aug. 9, Brighthouse had revenues of $2.1 billion, 11.2% lower than in the same quarter a year earlier. Analysts estimate that Brighthouse’s revenues will be $8.1 billion in 2017, flat in 2018, and growing by 3% annually after that. On the earnings front, it expects BHF to earn $9.28 in 2017 and $8.87 in 2018.
Currently trading at seven times 2018 earnings, BHF stock is fairly valued, but investors shouldn’t expect anything from it until sometime in 2018 or 2019 when growth reappears in its annuity business. MET will also face some difficulties over the next couple of quarters as it transitions after the spinoff.
I’d probably go with MET until Brighthouse Financial shows some growth on the horizon.
Courtesy Adient PLC
It has been almost a year since Adient PLC (ADNT) was spun-off by parent Johnson Controls International Plc (JCI).
In March 2017, it announced that it was working with Boeing Co (BA) on airplane seating, a move that could provide significant revenue diversification to go along with its leading position in automotive seating. The aircraft seating market is expected to reach $21.7 billion globally by 2025.
“As we expand into adjacent markets, we will share our knowledge internally and with our partners to improve the experience of passengers in the air and on the ground,” Adient spokesperson David Roznowski said at the time. “Autonomous driving … case in point. The company has advanced engineering, design and testing capabilities that allow us to explore ways to improve passenger comfort.”
In Adient’s Q3 2017 results ended June 30, it had adjusted EBIT earnings of $336 million or 3% higher than the same period a year earlier on $4 billion in revenue. In fiscal 2017, it expects revenues and adjusted EBIT (earnings before interest and taxes) of at least $16.2 billion and $1.2 billion respectively with projected free cash flow of $400 million
Year to date, ADNT stock is up 44% compared to 1% for JCI. Long-term, I expect Adient’s valuation to improve. With net debt of just $2.7 billion or a net leverage ratio of only 1.7, as it moves further into the aircraft seating industry, look for its share price to rise into triple digits.
Mike Mozart via Flickr
Both Yum! Brands, Inc. (YUM) and Yum China Holdings Inc. (YUMC) have had excellent years on the market with the parent and spinoff up 21% and 64% year to date respectively through October 10.
Yum Brands spun off its Chinese restaurants on Nov. 1, 2016. Up until April, YUMC stock didn’t do much trading around $25, but then its share price took off like a bat out of hell gaining 25% in one month on better-than-expected Q1 2017 results. It was off to the races.
Recently, YUM China got a bunch of analyst upgrades, including one from Nomura Instinet analyst Scott Hong, who initiated the company’s coverage of the stock with a buy rating and a $51.60 target price, 22% higher than its current price. Hong expects Yum China to grow earnings 14% a year through fiscal 2019.
However, on the downside, Yum China reported its Q3 2017 earnings Oct. 5 and while revenues were $60 million higher than the $2.04 billion analysts were expecting, earnings per share missed by four cents at 52 cents. Shares went higher despite the miss on strong KFC same-store sales growth of 7%.
I don’t think there’s any doubt YUMC is the stock to own here.
In this particular spinoff situation, you’ve got one parent and TWO spinoffs, which makes the decision that much trickier.
Hilton Worldwide Holdings Inc. (HLT), the parent, completed the spinoff of Park Hotels & Resorts Inc. (PK), Hilton’s real estate investment trust and Hilton Grand Vacations Inc (HGV), Hilton’s timeshare business, on Jan. 4, 2017.
Sometimes management carries out spinoffs to unload unwanted assets. Hilton’s situation was a case of doing the three-way split to deliver laserlike focus to all three areas of its business while extracting additional value for shareholders.
The day before the spinoffs, Hilton Worldwide had a market cap of $18.4 billion based on 330 million shares outstanding. HLT shareholders got one share of PK for every five HLT shares and one share of HGV for every 10 ten shares of HLT. Today, HLT has a market cap of $22 billion; PK has a market cap of $6 billion and HGV a market cap of $3.9 billion for a total of $31.9 billion or 73% more valuable than before spinoffs.
That’s what I call a smart move.
Now, which is the best buy?
Well, if you like the hotel business, Hilton is. If you believe that the economy is getting stronger, then HGV is; and if you like owning real assets, PK is.
For me, however, as much as like the asset-light model of HLT, its shares are relatively expensive, just like the rest of the hotel stocks, so I’ve got to go with the real assets of Park Resorts and its 6.2% yield.
With all the bad press Vornado Realty Trust (VNO) has gotten over its $428 million investment in Toys “R” Us, it’s good for shareholders that management has long since moved on from the failed 2005 purchase with two large private equity firms.
On July 19, 2017, VNO completed the tax-free spinoff of JBG Smith Properties (JBGS), a combination of Vornado’s Washington D.C. assets with certain DC-area assets owned by The JBG Companies. Vornado shareholders received one share of JBGS for every two VNO shares. After the completion, Vornado shareholders owned 73% of the merged, independent entity.
The resulting company is the largest office REIT in the D.C. area and the fifth-largest multifamily REIT. With 18.3 million square feet of future development in the pipeline, the spinoff enables JBGS to focus on Washington D.C. while Vornado focuses on New York City.
VNO’s share price is around the same level where it was trading in July; JBGS’s is down 10% over the same three-month period. Spin-Off Research analyst Joe Cornell gives JBGS a $48 target price, and as such I’m going to go with the contrarian play picking Washington D.C. and the spinoff over Manhattan and the parent.
ConAgra Brands Inc. (CAG), best known for brands such as Hunt’s tomato sauce, Orville Redenbacher’s popcorn, and so many others, spun-off Lamb Weston Holdings Inc (LW), its frozen potato business, on Nov. 9, 2016. CAG shareholders received one share of LW for every three shares held in the parent.
The move was made by ConAgra to make it more of a pure-play consumer foods business that investors could more easily value while allowing Lamb Weston to grow its business without the parent company getting in the way.
How has it worked out?
Before the spinoff, CAG had a market cap of approximately $20.6 billion. Today, CAG is worth $13.8 billion and LW another $7.2 billion adding just 2% market cap over the past year — a pathetic result for long-time shareholders expecting more.
So, which to buy?
Not an easy answer given both businesses are slow growers. However, because ConAgra is committed to increasing margins and cash flow while creating more value from its various brands, I think the potential is there to be a player in the grocery aisles, but it’s not there just yet.
This one requires a little faith.
Tegna Inc. (TGNA), for those unaware, spun-off its former publishing business, Gannett Co Inc. (GCI), in June 2015. Tegna shareholders received one share of Gannett for every two shares held in the parent.
Once that spin was complete, Tegna became a digital media company owning 46 television stations in 38 markets reaching 50 million adults daily plus Cars.com Inc. (CARS), its digital automotive marketplace with $630 million in annual revenue and 400 million in consumer site visits per year.
A year later, Tegna spun off Cars.com, with existing shareholders getting one share of CARS for every three shares held in the parent. The deal was an attempt to separate the two assets, allowing investors to value each of the businesses better.
For me, the answer whether you should buy TGNA or CARS is an easy one. Analysts like Tegna and so do I. Tegna’s 2018 EPS estimate is $1.62 per share, which means it has currently got a forward P/E of 8 and a 2.2% yield. Meanwhile, Cars.com is playing in a very competitive sandbox.
I’d go with the parent.
This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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