Forest Oil (
announced in late 2010 that it would spin off its Canadian energy
fields in a new company called
Lone Pine Resources (
, investors shrugged.
But investors who bought the parent of the spin-off when the deal
was completed on Oct. 3, 2011, are glad to have waited. Since then,
of Forest Oil have moved up from $9 to a recent $14. (Shares
dropped from $15 to $9 in early October when the spin-off took
effect, pushing shares up to an equivalent of $20 when the value of
the spin-off is included).
The key catalyst: Forest's remaining business has become much
easier for investors to assess.
Perhaps the main takeaway is that you should hold off buying a
company when it announces a plan to spin off a division. Instead,
you should pounce when the deal is done. Not only has Forest Oil
rebounded more than 50% after the event took place, but Lone Pine
Resources us up more than 20% since early October as well.
Just one day after that deal was done, on Oct. 4, 2011, Fortune
Brands, a diversified
, cleaned up its act by spinning out its liquor business, now known
Beam Inc. (Nasdaq: BEAM)
. The remaining business, known as
Fortune Brands Home & Security (Nasdaq: FBHS)
, became more of a pure play on the company's security and home
construction businesses. Since then, shares of Fortune Brands are
up 57%, while Beam is up 26%.
Look for more of these spin-offs to come.
Investment bankers, hurting for fresh ideas these days, are likely
knocking on the door of any major
that will listen to their sales pitch. Breaking up into two or more
pieces can be profitable for shareholders if the company is
suffering from a "conglomerate discount." This term refers to a
company's relatively low valuation because investors have a hard
time assigning a price-to-earnings (P/E) multiple on a group of
different businesses with varying growth rates.
As an example, recent media reports suggested that
Cisco Systems (Nasdaq: CSCO)
wanted to unload its cable-TV set-top box business, because the
unit carried lower margins and smaller growth rates than Cisco's
other businesses. In theory, Cisco would garner a higher P/E ratio
if it was a faster-growing company with a higher
profile. Cisco has since refuted the chatter, so this may be an
event that takes place down the road -- if at all.
Here are some other stocks that could arguably benefit by unlocking
value in their subsidiaries.
Big pharma or nimble biotech?
Amgen (Nasdaq; AMGN)
Biogen IDEC (Nasdaq: BIIB)
Gilead Sciences (Nasdaq: GILD)
all have a real conundrum on their hands. They are currently
profiting from a range of blockbuster drugs that generate strong
sales now, but those on-the-market drugs are unlikely to grow much
in the future. As a result, their P/E ratios have steadily
compressed over the years. Gilead and Amgen, for example, trade for
around 10 times projected 2012 profits. That's a multiple usually
reserved for major drug stocks like
that have shown almost zero organic growth in recent years.
But these relatively younger biotechs are also sitting on an
extensive pipeline of new drugs. To get credit for that pipeline,
it may be wise to create a
or an outright spin-off for this developing part of the business.
The parent companies, with mature drugs, could carry a decent
and minimal cash because they already have strong
. The spin-offs could be loaded up with cash to fund drug
development, a move that would also allow investors to better track
the value of these pipelines.
Johnson Controls (
is a fine example of a conglomerate in need of a divorce. The
company has an impressive array of products targeting the
auto-parts industry. Its heavy investments in new battery
technologies also hold a great deal of promise. Meanwhile, Johnson
Controls is also a major player in the movement toward greater
building efficiency, with leading
in heating, cooling and refrigeration systems.
Management must focus its energies on a lot of moving parts,
utilizing an army of middle managers to help monitor and develop
all of the company's sales and manufacturing efforts. In a
, Johnson Controls may remain saddled with the conglomerate
discount and not see much movement in the stock. Management would
be wise to mimic the value-unlocking moves that Forest Oil, Fortune
Brands and others have recently made.
Risks to Consider:
Shares can often languish when a spin-off is first announced.
They typically post better gains after the spin-off is
Action to Take -->
The level of spin-off activity has sharply rebounded. In the fourth
quarter of 2011 alone, eight companies announced spin-off plans
that were valued at least $100 million. If you see a spin-off
announcement and then shares drift lower, this likely creates a
solid time to step in, before the post spin-off rebound takes
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David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CSCO, GILD in one or more if its "real money"
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