Spin-Off Research In the News

Johnson Controls Looks Cheap

Posted by Joe Cornell on Tue, May 24, 2016 @ 09:05 AM


By May 21, 2016

The market is underestimating the likely positive developments of JCI’s spinoff of its automotive interiors division.

Since last June’s announcement by Johnson Controls (JCI) that it would spin off its automotive interiors division into a separately traded company, its shares have fallen 18% to $42.93. The market is down 2% over the same period. The Milwaukee-based industrial giant plans to distribute one Adient share, as the unit is called (with a ticker ADNT ), for every 10 JCI shares by Oct. 31, 2016.

Studies show spinoffs typically lead to a significant rise in the aggregate value of the two resulting companies’ shares compared to the market value of the combined company. In other words, the sum of the parts is often worth more than the whole. That’s because after a spinoff, managers in each firm improve capital allocation and focus on their respective businesses’ strengths.
industry_action.pngThe market is underestimating the spinoff’s likely positive developments as well as JCI’s proposed merger with Tyco International (TYC), a building fire and security systems provider, announced last January. Over the next 18 months, JCI could give a total return of 20%, to near $50, including shares of Adient, the largest automotive-seating system supplier.

JCI, a global leader in building heating and cooling systems, battery technology, and automotive interiors, has seen its stock dented by slowing economic conditions in China, Europe, and South America. Yet the strong dollar was a big reason why fiscal 2015 sales fell 4% to $37.2 billion. Currency-adjusted, sales would have risen about 5%. The currency pain should roll out of quarterly comparisons over the next 12 months. Moreover, a JCI combined with Tyco and without its automotive interiors business should be even more dominant in buildings systems.

Annual merger synergies of $650 million are expected within three years, including $150 million from lower taxes, since Tyco is Ireland-based and the merged company will be domiciled there.

JCI is strong in the Americas and Asia, while Tyco is a leader in Europe, and cross-selling opportunities should help operating margins rise, along with cost savings, says a recent report from Spin-Off Research, which has a Buy rating on JCI and a $48 valuation—$8 for Adient and $40 for the combined JCI-Tyco.

Adient provides about half of current JCI sales. But once Adient—with 5.8% margins in fiscal 2015, the lowest of the three businesses—is removed, the 8% margin of building systems and 17% at the batteries division will shine through. Corporate-wide margins should go from less than 9% to 12%, post spinoff. Tyco’s margins run 11% to 12%.

As that becomes clear, JCI’s valuation could approach its long term average price/earnings ratio of 14 times. Currently, JCI trades at 11 times consensus fiscal-year 2016 earnings-per-share estimates of $3.91, excluding Tyco. Spin-Off Research values JCI at about $40, or 14.5 times its FY2017 EPS of $2.78, including Tyco but excluding Adient.

Adient has said margins should rise to 6.8% to 7%, and Spin-Off values its stock at $8, using a P/E of 10 times EPS of 82 cents in fiscal 2017. Adient’s value plus payout could bring total return near $50 per share. JCI has said it should be able to at least maintain the current annual $1.16 dividend.
Some believe the merger might face extra scrutiny from the Obama Administration, which has been tightening rules on inversions. Jeff Hood, a managing partner at VogelHood Research, a policy research outfit in Washington, D.C., says the government is unlikely to oppose it. This is a merger with little business overlap that makes industrial business sense—and isn’t just driven by tax savings, he says.

The distribution of Adient shares, as a foreign-domiciled London firm, to JCI shareholders will be taxable, so the return to a U.S.-based shareholders could be a few percentage points lower.

JCI has a strong track record of growing profitability, a good balance sheet, and dividend growth of 14% over the last five years. These changes should make JCI shares attractive for the long-term oriented investor.
Click here to view the article on barrons.com: Johnson Controls Looks Cheap

Tags: Spinoff, Spin-Off, Johnson Controls, JCI, Adient

Spinoffs Are Slowing, but Value Plays Still Exist

Posted by Joe Cornell on Mon, May 02, 2016 @ 09:05 AM


Investing in spinoffs has become a crowded trade, but Energizer and MSG are still attractive.

By Reshma Kapadia | Barron's | April 30, 2016

Much like the little-known gem of a restaurant that loses some of its luster when the masses swoop in, spinoffs often lose their cachet when too many investors chase too many of them. But true foodies—and savvy investors—always know where to look for the next great find.msg.jpg

Since 1999, newly liberated companies outperformed the Standard & Poor’s 500 index by six percentage points in the first two years after they were spun off, according to Goldman Sachs. And over the past five years, the Bloomberg Spinoff Index has returned 103%, compared with 55% for the S&P 500. The index tracks, for three years, companies that launch with a market value of at least $1 billion.

Studies have attributed the superior performance of spinoffs to factors including investors’ greater appreciation of a business after it is no longer ensconced within a larger entity, plus the new company’s ability to be run more efficiently, get more dedicated resources, and more effectively incentivize management.

Enter the hordes. In 2014 and 2015, spinoffs surged, with 100 new companies launched, often as a result of pressure from activist investors. Spinoffs concocted under duress have a mixed—and occasionally horrible—track record. Shares of specialty-chemical firm Chemours (ticker: CC) are down 56% since DuPont (DD) spun it off last summer at the urging of Nelson Peltz’s Trian Fund Management.

“You don’t get the same quality of spinoffs as you do if management and the board have come to that decision without pressure,” says Ivy Mid Cap Growth fund’s manager Kim Scott, who often looks at spinoffs for potential investments.

That decline in quality is borne out in recent returns. Over the past year, as the S&P 500 has fallen 0.6%, the Bloomberg Spinoff Index has slid 6%. The 42-stock Guggenheim Spin-Off exchange-traded fund (CSD) has fared even worse, down 17%. Clearly, this isn’t a market for simple index investing.

Instead, investors must be choosy about picking the right type of spinoff, and at the right time. In the past, companies spun off unprofitable or marginally profitable businesses that investors essentially valued at nothing. It would take a few years to get a spinoff’s profitability up to the industry level once it was on its own. But as that happened, it would drive the stock higher, says Murray Stahl, chief investment officer of Horizon Kinetics. “You don’t see as many spinoffs like that now,” he observes. “You’ll have to wait for a recession, when companies lose customers, are saddled with debt, and profitability declines” to find a better crop to invest in.

With 2016 on track to be a lean year for spinoffs, timing becomes even more important. There have been just nine so far, putting the year on pace for 27, down from last year’s 40, according to Joe Cornell, founding principal of the advisory firm that publishes Spin-Off Research.

To do well, investors must get in earlier or wait several months after a spinoff is listed, when shareholders in the parent company dump the spinoff’s stock. Often a company that’s spun off is too small for institutional investors or in an industry they dislike. “Investors need to do a lot more homework than simply buying a basket of spinoffs, which might have worked in 2013 or 2014,” says Jonathan Morgan, deals analyst at Edge Consulting Group, which advises investors on spinoffs and special situations. “You really need good timing now.”

Spinoff stocks might trade higher in the when-issued market—a few days before the shares are distributed—often making them overvalued when they come out. In that case, be patient and wait for them to come back down.

ENERGIZER HOLDINGS (ENR) embodies traits that have typically led to outperformance by spinoffs. Energizer spun off its steady cash-generating battery business last July, giving the spinoff its old name. The parent entity retained its faster-growing businesses—including its Schick, Playtex, and Hawaiian Tropic brands—and renamed itself Edgewell Personal Care (EPC). Energizer’s shares have risen 25% since then, but Gabelli Asset fund manager Kevin Dreyer sees about 15% more upside.


Dreyer expects margins to improve due to a shift in the competitive landscape. Berkshire Hathaway purchased rival Duracell in 2014. Under Procter & Gamble’s ownership, Duracell was often promotional, but Dreyer expects the new owners to run the business with an eye toward maximizing cash flow, which should mean fewer price wars. Analysts expect Energizer to earn $135 million, or $2.17 a share, this year, on sales of $1.6 billion.

Now that Madison Square Garden (MSG) is free from MSG Networks (MSGN), it can use the $1.6 billion on its balance sheet to grow via acquisitions or buy back shares. It could also monetize the air rights above its midtown Manhattan arena. In the interim, the company, which became independent in October, has stable and modestly growing cash flow from the sale of TV rights. Analysts expect net income of $28 million, or $1.13 a share, on $1.1 billion in revenue for the fiscal year that ends in June, with a 3% increase in profits on a 7.5% sales rise next year. The company could also be an attractive takeover target, says Cornell, who thinks the stock could rise 30%, to $210 from its current $160.

THE CLASSIC WAY to benefit from a spinoff, of course, is to buy shares of its parent company before the deal is done. Cornell suggests Fiesta Restaurant Group (FRGI), which plans to split off its slower-growing, but cash-generating, fast-casual restaurant Taco Cabana. Fiesta will change its name to Pollo Tropical, the faster-growing Caribbean chicken chain it will retain—a cult hit in South Florida that is expanding elsewhere. A date for the spinoff has not yet been announced.

Raymond James restaurant analyst Brian Vaccaro argues that Taco Cabana deserves a forward multiple of eight times earnings, in line with where Fiesta currently trades. Pollo Tropical, however, could fetch a multiple of 11 or more as it expands—last year’s sales growth was 19%, triple that of Taco Cabana’s. “I’ve always looked at [Fiesta] as a sum-of-the-parts story, because there is a big differential in the growth prospects of the two chains,” says Vaccaro, who thinks Fiesta stock is worth $45, versus its recent price of $34. “Now, more investors are beginning to look at it from that view.”



Spin-Off Research is published by Spin-Off Advisors, LLC. Spin-Off Research is a subscription-based service for Professional and Institutional Investors.  Blog entries are delayed.  Spin-Off Research subscriber-base receive the spinoff report at time of press via Email Bulletins.  To learn more about becoming a subscriber, please contact us. Spin-Off Advisors, LLC provides coverage on all US and major Global spinoffs, carve-outs and split-offs; Spin-Off Research published since March 1997.


Tags: Spinoff, ipo, carve-out, Spin-Off