Spin-Off Research In the News

Bottom Line: On The News - Corporate Spin-Offs Attractive for Investors

Posted by Joe Cornell, CFA on Mon, Aug 27, 2012 @ 14:08 PM

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Corporate Spin-Offs attractive for investors, we hear from Joseph W. Cornell, CFA. In the first seven months of 2012, an index of companies spun off over the past three years had returns nearly double those of the S&P 500. His favorites: Alexander & Baldwin (ALEX) has separated its attractive real estate and agriculture unit from its ocean transport and logistics unit...Post Holdings, Inc. (POST) was spun off from food conglomerate Ralcorp Holdings, Inc.

Joseph W. Cornell, CFA, is principal of Spin-Off Advisors, an independent equity research firm, Chicago, and author of Spin-Off to Pay-Off (McGraw-Hill). www.spinoffresearch.com

Bottom Line, on the news (Sept. 15, 2012 Issue)

Tags: Alexander & Baldwin Spinoff, POST Spinoff

With Spin-Off, McGraw-Hill Looms As The Next Attractive Stock Among Growth-Value Stock Plays

Posted by Joe Cornell, CFA on Wed, Aug 08, 2012 @ 13:08 PM

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Gene Marcial

Street Beat

INVESTING | Aug. 7 2012

It’s time for investors to eyeball McGraw-Hill (MHP) as the new and potentially robust growth- and-value stock play,  as it gets closer to splitting up into two companies. By Year-end, it will spin off to shareholders its education unit.

Already the stock is reflecting an upward spin, climbing to $49 a share from $42 over a month ago–and way up from a 52-week low of $34 in August last year. It closed on Aug. 7, 2012, at $49.41, up nearly 2%.

Some bulls predict the stock will continue to leap to much higher ground–to the high $50s or more in six to 12 months–as investors see more traction in the stock from the impending spin-off.

In spite of its seemingly unwieldy structure as a conglomerate, McGraw-Hill Cos has been one of corporate America’s steadfast stalwarts, providing global information services to such diverse businesses as financial service, commodities, and education, through various subsidiaries, including Standard & Poor’s, McGraw-Hill Education, S&P Capital IQ, and J.D. Power & Associates.

By year end, however, McGraw-Hill will become a more focused and reinvigorated company: It will split into two independent companies–McGraw-Hill Financial and McGraw-Hill Education–through a tax-free spin-off of the education business.

The split will “result in the creation of a pure-play financial-services-and-analytics-business behemoth in the form of McGraw-Hill Financial, with synergies flowing among its business units,” says Joseph Cornell, president of Spin-Off Research, in Chicago. The separation will undoubtedly improve strategic focus on each separate company, he adds.

“With the absence of common customers among the education and financial services businesses and significantly different risk-reward opportunities, we believe the separation will enhance shareholders’ value,” says Cornell.

Wall Street has always adopted a ho-hum attitude towards most conglomerates, so by letting go of its education operations and stand as an independent company, investors can focus on McGraw-Hill Financial as an opportunity to buy into a fresh and reinvigorated growth-and-value play.

The split-up was triggered by demands from activist investors, notes Cornell, who felt the declining education business has been a drag, negatively affecting the price performance of McGraw-Hill’s stock.

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Harold W. McGraw III, McGraw-Hill’s chairman, president and CEO, says the separation is part of McGraw-Hill’s “growth and value plan,” and believes the two companies would improve growth prospects and at the same time deliver superior shareholder value. The plan calls not only for cost reductions and separation of the two units, he says, but involves getting into more “strategic investments.”

An example he cites is the launching of the S&P/Dow Jones Indices, which combine two iconic brands that should continue delivering index-based solutions for global investors. Although the joint venture is still unheralded, there are now $1.5 trillion directly linked to the indices, with more than 400 financial institutions using them to build or price funds, swaps, notes, options, forwards, futures and stocks. These institutional investors consider S&P/Dow Jones as the “most trusted indices in the world,” notes McGraw.

McGraw-Hill Financial, he says, will continue to “deliver solid top and bottom line growth and build new capabilities to “provide organic growth while pursuing bolt-on acquisitions.” And McGraw-Hill Education, he says, will focus on building “a unique set of digital products for longer-term growth as the market recovers and the digital shift accelerates.”

Speculation has swirled that a larger company or private equity capital fund may be interested in acquiring McGraw-Hill’s education group even before the split-up. McGraw-Hill spokesman Jason Feuchtwanger declined to comment on the rumors. Among McGraw-Hill’s peers in education are Pearson (PSO), John Wiley & Sons (JWA), and Scholastic (SCHL).

“We estimate a breakup value in the mid-to-the high $50s, based on a double-digit multiple of EBITDA for McGraw-Hill Financial’s assets and a mid-single digit multiple for Education’s assets,” says Edward J. Atorino, veteran financial-service, media and education analyst at investment firm Benchmark.

A long-time bull on McGraw-Hill, Atorino rates the stock as a buy, based in part on his earnings estimate of $3.35 for 2012 on revenues of $6.44 billion, and $3.61 for 2013 on $6.85 billion, up from 2011’s $2.91 a share on sales of $6.24 billion.

McGraw-Hill is aggressively expanding its digital education products to offset weak school sales, which have led to profit declines for the education unit, says Atorino. On the other hand, McGraw-Hill’s financial operations have “strong growth prospects,” says the analyst, who also notes that the company’s annual dividend of $1.02 a share, or payout yield of 2%, should lend valuation support to the stock.

Indeed, the stock has started to reflect the value of the stock on the imminent McGraw-Hill split — and its long-term implications for the new McGraw-Hill enterprises.

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Forbes - INVESTING - With Spin-Off, McGraw-Hill Looms As The Next Attractive Stock Among Growth-Value Stock Plays

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McGraw-Hill Spinoff featured (MHP).

Note: Joe Cornell, CFA is founder of Spin-Off Advisors, LLC, publisher of Spin-Off Research, and author of "Spin-Off to Pay-Off" (McGraw-Hill.) Mr. Cornell can be reached at 312-939-8900, or visit www.spinoffresearch.com

Tags: McGraw-Hill Spinoff, MHP Spinoff