Over the last 100 years, large U.S. companies would often buy secondary businesses either because it enhanced its current business model or because it didn’t know what else to do with its cash.
In 1976, for instance, oil giant Mobil Oil bought department store chain Montgomery Wards in one of the strangest marriages between two companies. When business divisions are in totally separate industries, there can be calls for a spin-off.
Shareholders and analysts argue that spinoffs of a division can unlock “value” that Wall Street simply isn’t recognizing in a company when it is a part of a larger business.
Spinoffs are not the same as new companies going public, though they sometimes get lumped into the same category. Spinoffs usually have a much longer business history, such as Coach’s (COH) 59 years in business before its IPO, and that can translate into an experienced management team. Financial data can also be easier to come by because its sales and earnings are usually reported as part of a larger conglomerate.
Not all spinoffs move higher out of the gate, but these three spinoffs have seen their shares soar since their parent company set them free. They also have an attractive Zacks Rank and earnings growth.
Let’s take a look at each one:
TripAdvisor is the largest travel web site in the world. It has 260 million unique monthly users.
- Forward P/E = 59
- 2013 Expected Earnings Growth = 1.6%
- 2014 Expected Earnings Growth = 33%
Zacks Rank #3 (Hold)
TripAdvisor has a good earnings surprise track record since its IPO. It has only missed once.
Shares are up 205% since the IPO.
Fortune Brands Home & Security
Fortune Brands Home & Security (FBHS) displays its pedigree in its name, as it was spun-off from Fortune Brands in September 2011. The company sells MasterBrand kitchen cabinets, Moen faucets and Simonton windows as well as security products through the Master Lock brand.
- Forward P/E = 27.5
- 2013 Expected Earnings Growth = 68%
- 2014 Expected Earnings Growth = 28%
Zacks Rank #2 (Buy)
Fortune Brands Home & Security also has a solid earnings track record, with just one miss since its IPO.
As the real estate market has heated up, and consumers started spending money remodeling their homes again, the company’s earnings and revenue has soared.
Shares are up 223% since the IPO.
Fiesta Restaurant Group
Fiesta (FRGI) is the least known of these three companies. It was spun off from Carrols (TAST), which operates 570 Burger King (BKW) restaurants in 13 states in the Northeast and Mid-Atlantic, in April 2012.
It operates 310 quick-casual restaurant brands Pollo Tropical and Taco Cabana. Pollo Tropical offers tropical and Caribbean inspired food at 100 company owned and 38 franchised restaurants in the U.S., Puerto Rico, the Bahamas, Costa Rica, Ecuador, Honduras, India, Panama, Trinidad & Tobago, Venezuela and the Dominican Republic.
It has been aggressively expanding the Pollo Tropical chain internationally. Fiesta also operates 164 company owned and 8 franchised Taco Cabana restaurants in the U.S.
- Forward P/E = 54.5
- 2013 Expected Earnings Growth = 29%
- 2014 Expected Earnings Growth = 26%
Zacks Rank #3 (Hold)
For 2014, it expects to open 20-22 Pollo Tropical and 2-4 Taco Cabana restaurants. It also forecasts 2014 comparable restaurant sales for Pollo Tropical of 3% to 5% and 1.5% to 3.5% at Taco Cabana. Fiesta also has a solid EPS track record. It has just 1 miss since its IPO.
Shares are up 237% since the IPO.
[In full disclosure, the author of this article owns shares of TRIP.]