This week has been nothing less than a whirlwind of spinoffs, with 10 major corporate divisions becoming or ready to become their own publicly-traded entity since Monday.
DuPont (DD), for example, has spun off specialty chemical division Chemours (CC), Baxalta (BXLT) is slated to spinoff from Baxter International (BAX) today, and Energizer Holdings (ENR) is going to spinoff Edgewell Personal Care Company (EPC) in the very near future.
Why the wave of spinoffs against a backdrop or merger-mania? In other words, why are these companies shedding when everybody else seems to be buying?
The right answer is also the most reasonable-sounding one — these divisions are either no longer aligned with the bigger corporate vision, or would be worth more to shareholders as stand-alone companies, or both.
In most cases, the spinoff strategy ultimately works to reach that elusive goal of unlocked value.
While it’s too late to reap the benefit of the breakups of Energizer Holdings, DuPont and Baxter International, there are a handful of upcoming spinoffs that may just prove to forward-thinking shareholders that the sum of the parts can end up being greater than the whole. Here’s a look at your four best spinoff bets.
Spinoff trade #1: eBay (EBAY)
Yes, the move is largely the result of Carl Icahn’s insistence. But PayPal could very well be better off on its own. The division is expected to be spun off from underneath the eBay (EBAY) umbrella, when the two-pronged company splits on or around July 17.
PayPal is the growth powerhouse within eBay, as it capitalizes on an accelerating number of smartphone users who have (mostly) all decided to live their lives — including their financial lives — around their mobile devices.
The premise of the PayPal spinoff was fully vindicated back in April when eBay reported that the revenue generated by PayPal in the previous quarter was greater than the revenue produced by the company’s online market and auction platform.
The edge for current and would-be EBAY investors is that the market has largely priced EBAY stock as if it has less value and few prospects than it actually does. JP Morgan has even opined it’s going to be attractive enough to be a buyout target once the PayPal spinoff is completed.
Spinoff trade #2: Hertz (HTZ)
Many investors don’t realize it, but Hertz (HTZ) rents more than just cars. It’s also in the equipment rental business, selling usage of everything from dump trucks to light towers to scissor lifts.
While there’s a market for this service, it clearly isn’t the same target market for the company’s auto rental division. Indeed, the two divisions have little in common at all, which makes it tough to manage as a whole.
So Hertz decided to spinoff the equipment rental business altogether. A firm date hasn’t been set yet, but it should happen before the end of the year.
Those who know the company will also know HTZ shares are currently venturing into new multi-year low territory, with much of the recent weakness stemming from reports that Ford will soon be launching a ride-sharing program that will take another swipe at Hertz’s core business.
With a singular focus on winning the car-rental game though, HTZ could quickly recover what’s been lost to indirect competition like Uber and Ford’s entry into that race. (It doesn’t hurt that Uber’s starting to lose much of its sheen.)
Spinoff trade #3: SPX Corporation (SPW)
To say SPX Corporation (SPW) is a general industrial manufacturer doesn’t do justice to its broad product line. SPX makes everything from coffee bean dryers to valves clamps, for the industries ranging from food services to nuclear power production.
While diversity is commendable, being a jack of all trades generally means being a master of none. That’s why SPX Corporation is planning a spinoff of its Flow division, which manufactures centrifugal and reciprocating pumps, various control valves, filtration and dehydration equipment, mixers, plate heat exchangers and hydraulic technologies.
While more than a little boring on the surface, the company is underestimated, and could be even more so once the Flow division and the infrastructure side of the business get out of each other’s way. The spinoff is expected to be completed at some point in the third quarter of this year.
Perhaps more importantly, analyst are staring to tell investors the same. Merrill Lynch recently upgraded SPW — from an “underperform” to a “buy” — largely based on expectations of consolidation within the pump and valve industry.
Spinoff trade #4: Symantec (SYMC)
Last but not least, Symantec (SYMC) is planning a spinoff of its information-management division Veritas, scheduled for December of this year.
Of all the spinoffs in the queue, this one may the most underestimated one. Credit Suisse explains:
“We estimate that Veritas could be valued near at least $8.8 billion (4.4x LTM EV/maintenance revenue), which would translate into an enterprise value for the parentco of $5.7 billion at the current stock price — equal to only 5.8 times our fiscal year 2016 earnings estimate (which we view as unsustainably low).”
Credit Suisse also conceded that much of the spinoff’s value will depend on how the final divvying-up shakes out, but either way, one entity or the other is going to be undervalued. The split will simply clarify the matter, and may even show that both divisions are currently underestimated.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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