Alcoa Inc (AA) stock jumped 5% on a Monday where the Dow Jones Industrial Average fell 300-plus points. That’s rare to see, but the reason was Alcoa’s decision to break its company into two, which includes its faster-growing plane and car business and its core aluminum operations.
At 11 times next year’s earnings, Alcoa’s current stock price reflects the boring, slow growth of its aluminum business, but the plane and auto operations would likely support a far higher stock multiple.
In essence, that’s why companies split — to unlock shareholder value and form two independent management teams that can seek new opportunities and focus on specific operations.
With that said, let’s look at five more companies that would be wise to follow Alcoa’s lead, and could unlock significant shareholder value by doing a split of their own.
Companies That Should Split: Corning (GLW)
Corning (GLW) is a large company with well over $9 billion in trailing-12-month revenue. About half of that revenue is tied to the manufacturing of LCD glass and Gorilla Glass that protects hundreds of consumer electronic products like the iPhone. Combined, these businesses account for the majority of Corning’s annual profits.
GLW trades at 8 times FY2016 expected earnings minus cash, well below the market average. By separating its core glass businesses from non-related operations like emission technologies and the manufacturing of optical equipment, GLW could unlock even more value.
Not only would the double-digit growth of GLW’s optical business shine, but a more focused management team could pursue new opportunities for Gorrilla Glass outside of consumer electronics, such as for automobile glass.
GLW agreed last year to supply Gorilla Glass for BMW’s i8 sports car, and according to Forbes, the auto industry represents a market opportunity six times larger than consumer electronics. Thus, a split of sorts could unlock growth opportunities and unveil businesses that are currently undervalued.
Companies That Should Split: Johnson & Johnson (JNJ)
Johnson & Johnson (JNJ) is cheap all-around, and operates two businesses in pharmaceutical drugs and devices and then consumer products that have no real direct relation to the other.
While JNJ’s growth has been sidelined by currency exchange issues, its growth is as impressive as any large pharma or large consumer goods company in the market today.
At 16.5 times earnings, JNJ trades well below the 22 times multiple for PFE and 25 times earnings multiple for CL. With equal growth, JNJ could very well support the same multiples if its businesses were more focused.
Companies That Should Split: Amazon (AMZN)
Amazon.com’s (AMZN) cloud business, Amazon Web Services, is a bright star for its business, and far more valuable than most realize. AWS is AMZN’s cloud infrastructure services business, controlling a 30% market share in an industry with 50% annual growth.
Looking ahead, analysts expect AWS to reach $10 billion in revenues by next year, and earlier this year, I made a case that Amazon Web Services could be worth $100 billion if spun off by itself due to the growth outlook and AMZN’s leading market share.
If AWS would be worth $100 billion by the time AMZN spun it off, that would leave a valuation under $150 billion for a core e-commerce and media business that should create close to $100 billion in revenue this year.
While that doesn’t make AMZN look particularly cheap, it does make the company look more fairly valued compared to today. By splitting AWS and AMZN’s core businesses, the former would have the opportunity to pursue new growth opportunities and partnerships independent of Amazon, whereas AMZN would be able to focus exclusively on growing its core business without worrying about that small, but very valuable cloud services business.
Long-term, it would appear the best move to drive shareholder value.
Companies That Should Split: Dish Network (DISH)
Dish Network (DISH) is known for its satellite TV services, but its most valuable asset is an unused block of mostly AWS-4 spectrum that Wells Fargo figures is worth $40 billion or more. The FCC approved DISH’s airwaves for mobile use back in 2012, and gave the company a 2017 deadline to cover “40 percent of the population in areas covered by its AWS-4 spectrum with a wireless network in the next four years.”
So far, not one mobile device runs on that spectrum.
The options to acquire a wireless company are running low, but with DISH having a market capitalization of only $27 billion, there is great value to unlock by splitting that business, possibly into a REIT, and letting someone with wireless experience lease the network, or divest it.
That said, Verizon (VZ) has been rumored of late as being interested in leasing Dish Network’s spectrum. Analysts have figured it would cost Verizon $2.5 billion per year over 40 years, and if DISH can get other carriers on board, it can create significant shareholder value from that spectrum network.
At this point, anything is better than nothing at all.
Companies That Should Split: International Business Machines (IBM)
International Business Machines (IBM) just added two new reporting segments to its business: Internet of Things and Education. This now makes eight total that will combine to create $83 billion this year and an expected $82.2 billion next year.
IBM is a collection of businesses that have seen consistent declines for the last four years. However, those declines are starting to slow, and some growth businesses are starting to arise. At less than 9 times next year’s earnings, IBM is a reflection of a company with four years of revenue declines. Those growth businesses like cloud-delivered-as-a-service and now IoT are performing very well, with the former’s revenue run rate up $700 million quarter-over-quarter to $4.5 billion.
Therefore, IBM should spin off that $4.5 billion business and the new IoT segment, which also should grow fast and become very large. Like AWS, these businesses would demand much higher multiples, and could account for 25% of IBM’s market cap despite being responsible for just 5% of revenue.
That in turn would make IBM’s remaining core business even cheaper, likely creating additional shareholder value.
As of this writing, Brian Nichols was long GLW.
