ITT Corporation has announced that it intends to use a stock spin-off process to separate the company into three parts:  water technology, defense technology, and the rest of ITT that will be left with those two off on their own.

The is no lack of coverage or awareness of this or most other stock spin-offs now.  Perhaps there was a time when spin-off stocks traveled under most investors’ radars, but that advantage for savvy value seekers has been diluted by websites, blogs, and even highly touted, heavily sold “all-you-to-do-to-beat-the-market” e-books and courses.

The ITT spinoff even has its own website to explain exactly what is going to happen,  http://www.transformationitt.com .  “Three Strong Businesses Positioned to Create Significant Value for Shareholders as Standalone Companies” is apparently their motto.  The pro forma revenues are reported at $3.6 billion from water, $5.8 billion from defense, and $2.1 billion from ITT which they describe as “a diversified global manufacturer of highly engineered industrial products.”  So you and everyone else has more than enough data to get totally bored or confused.

So what’s an individual investor to do?  Other than give up the whole thing, of course.

First off, you can just read the information, draw your own conclusions and make your best estimates of the potential for the parts of the transaction, parent stock and spin-off stock.  That can work quite well actually.  Do you think defense spending will be cut?  Do you think that the world demand for clean water will be a profitable area in the future?  No one has a chart with data on the right hand side that goes beyond today’s date.  Take a deep breath and make your own predictions.  They’re likely to be as good as anyone elses.

As far as I can tell at this point, this spin-off does show signs of being a situation in which the sum of the parts could turn out to be worth more than the whole.

• Though the underlying theme is engineered solutions to complex challenges, each is working in an identifiably different area of application.
• All three entities are in the business of keeping an increasingly efficient flow of limited natural resources flowing to the world’s economies.
• It doesn’t look like the spin-offs are an attempt to dump toxic assets.
• Top executives from the current ITT are going with the new companies.

On the other hand, none of them seems as though it is going to be so different from the current parent company that they will necessarily be automatically dumped by current shareholders creating value that way and they haven’t told us how debt will be apportioned among the three companies.  So, watching, reading, and trying to put it all together is going to be necessary.

Another way to go is to pick some measurable characteristic(s) of the companies’ operations that make sense to you for which you have access to accurate information.

This can take a bit of digging,  but if you find something that others may not be taking into account, it can be well worth the effort.

Ratios can be helpful in this regard because they allow you to compare the data across several companies.  The challenge here is to make an accurate decision about what companies  to compare each component to.   It’s fairly easy to find them for the current configuration in free content on the internet.   For the current ITT  the Morningstar website lists the price/book ratio to be 2.6,  price/sales 1.0, forward Price/Earnings 12.7, and Price/Cash Flow 12.8.  And often, others will even do some calculations for each component of the spin-off for you, especially for the high visibility spin-offs like this one.

Take advantage of those.

As with most stock spin-offs, there is plenty of time to watch the process unfold and decide if, when, and where to enter.  Make the trade come to you.

Tags: ITT, stock spin-off, stock spin-off investing, Value Investing

To no one’s surprise, Frontier Communications, FTR, is down sharply on heavy volume after its stock spin-off from Verizon, VZ.    Actually, there must be someone who is surprised, but apparently they are part of a small group of Verizon shareholders who were backpacking in the wilderness or who get terribly bored thinking about money or something.

On my weekly charts I see that over the last 20 weeks FTR has had an average of  about 29 million shares change hands each week.  Last week the volume was 110,589 shares with the price opening the week at 7.56 and finishing Friday at 7.35.  Today by lunchtime on the East Coast today we’ve seen 27,332,000 shares change hands and the price is down nearly 5% at 7.01.

It  doesn’t take Jesse Livermore to detect the current trend in the spin-off stock here, but so what?  The question is always whether there is a workable opportunity in this action and if there is, how can we get on the profitable side of it?

Sooner or later this kind of thing usually gets over done, but in my limited experience, prices have an incredible ability to stay “too high” or “too low” for too long,  getting me too nervous and/or too financially stressed to hold on until the price comes back to “reality” (which is an odd choice of words since reality is clearly the price shown right on everyone’s screen at every moment.)

So, what to do?  For myself, (since as I mentioned in a previous post, my ADD won the day another time and I was amazed to find myself the proud owner of 12 shares of FTR,)  I am going to hold onto the shares received in the stock spin-off for their entertainment value if nothing else.

When and if I buy more FTR in the future will be determined by the trading plan that I put together some time ago far from the heat and confusion of the specific companies and businesses and business cycles.  Having tried to catch one falling knife too many, I find that having a plan and sticking to it is the only way I can stay sane and effective.

Tags: Frontier Communications, FTR, stock spin-off, stock spin-off investing, Verizon, VZ

Motorola, MOT, has been going to do a stock spin-off of its cell phone business for a long time.  Just do an internet search on  Motorola spin off and you’ll get an idea of how many sources have written about this.  Sometimes it’s the “money losing cellphone unit” and sometimes it isn’t money losing in the stories, but it has always sounded at least a bit questionable from a shareholder perspective.  Sure, Motorola may be stronger without its cellphone business, but if I own MOT now and they split it apart giving me both pieces, the deal is a wash.

But that’s all different now.   According to Daily Finance author Dawn Kawamota, it is going to be structured so that the deal makes sense from both sides.

Sounds OK.  Fortunately for me and you, these things play out at what could be described at a grand pace.  Stock spin-offs are not for those with a short attention span, (at least if you have a good system of electronic alerts set up to wake you at opportune moments.)

There will be plenty of press releases, news articles, and SEC filings before you have to decide what you may want to do.

It could be a great opportunity for all involved . . . or not.  We’ll see.

Tags: MOT, Motorola, stock spin-off, stock spin-off investing

“When Do Analysts Add Value? Evidence From Corporate Spinoffs” , an academic paper, was the result of viewing 1739 analyst reports on corporate stock spinoffs.

My first response was to think just how thankful I am that the authors of the paper read all those analyst reports and not me!  They did it and I don’t have to.  They deserve another step toward tenure.  Seriously.  Whew!

Their observation that even though analysts could add a lot of information about the prospects of the spun off company, they usually don’t was not much of a surprise.  Even with all of the SEC documents that are filed on pro forma financials and the information in previous filings on the part the new entity played in the whole company in the past, it is common for it to seem like it is a pretty empty corner of analysis and prediction.

Actually, I sort of hope they don’t spur the analysts to get into this area more, since that lack of interest and information has always seemed to be a source of the mis-pricing that can create value in a stock spin-off.  There are precious few of those now that computers and the internet are flooding us with more information than most of us can deal with anyway.

In any event, the online synopsis of the paper reads easily for an academic piece and is worth a look.

Tags: analysts reports on spin-offs, spin-off stock, stock spin-off, stock spin-off investing

The stock spinoff of Myriad Pharmaceutical (whose symbol will be MYRX when the shares are distributed)  from Myriad Genetics, MYGN, is official though it doesn’t really happen until June 30, 2009.

The Salt Lake Tribune explained it . . .  mostly.  Apparently the Securities and Exchange Commission approved the spinoff and the registration is in place,  but shareholders will not receive shares of the new company until June 30th.  In the meantime, very thin trading has been reported for the “when issued” version of the shares that are trading under the ticker symbol MYRXV with them closing their first day at $7.    The “V” denotes when issued.  After the June 30 distribution the symbol will simply be MYRX.

A new company in the sense that it will be completely separate from the parent, Myriad Genetics, for the first time,  Myriad Pharmaceuticals will have the advantage of continuation of leadership. 

This is always an important issue in assessing a spinoff.  To put it bluntly, “Do these guys know what they are getting into?  Do they know what they are doing?” 

In the case of Myriad Pharmaceuticals, the decision of  Adrian Hobdon, PhD,** to head the newly independent company seems to be a very positive sign.    Dr. Hobdon has been with Myriad Pharmaceuticals, Inc. , and hence Myriad Genetics, since October 1998.   Before that he was at Glaxo Wellcome where, over a period of 17 years, he ran a number of departments within the drug discovery area.  Dr. Hobden obtained a BA in 1975 from Cambridge University and a Ph.D. from Leicester University in 1978. 

While no one can forsee the future, that this experienced, successful man has decided to stake his personal future on this new stand-alone entity  is a very positive sign.  He must believe that the chances of the new drugs that are in the pipeline turning out to be successful ones are very good.

That aside however,  since the new pharmaceutical company doesn’t have any FDA approved pharmaceuticals to sell right now, it will be interesting to see what Myriad Genetics shareholders do with the stock they receive in the spinoff.  It could be a classic spinoff price situation setting up.

With all the talk lately of who should spinoff what to get toxic business segments off of their balance sheets, it is encouraging to see a plan come along that may actually take advantage of the strengths potentially found in a spinoff.

**Note that in the original version of this post Dr. Hobdon’s biography was incorrect and is corrected here.

Tags: MYGN, Myriad Genetics, Myriad Pharmaceuticals, MYRX, MYRXV, spin-off stock, spin-off stocks, stock spin-off investing

Stock spin-offs are supposed to be part of what is called value investing, but what the heck is that really?

I know, I know, it’s finding stocks that are actually worth more than the market thinks they are and buying them before everyone else finds out. Then we sit back and pray that we don’t find out that everyone else knew all along that in fact the market had it right all along, but rather is going to find out just in time for us to sell our stake to them.

Fair enough and these situations do happen, but we are talking money here and to other participants in the marketplace aren’t dummies.

It is a pretty tall order to find mis-priced merchandise when you are up against the stockpicking equivalents of Michael Jordan, Peyton Manning, and Joe DiMaggio every day, but we are trying to do exactly that. And, as the old cartoon character Snagglepuss used to say “And don’t you forgit it!”

I think that a better definition of value investing ought to include finding corners of the marketplace where the very smart, very savvy, very tough superstars either aren’t allowed to work or where it is not worth their time to work and, hopefully, where we actually have an edge.

Everyone, including short sellers, is trying to buy low and sell high.

Tags: stock spin-off investing, Value Investing

Chesapeake Energy is planning a stock spin-off of its midstream natural gas operations. Apparently they haven’t said exactly what they are going to do or in what form it will occur. What they did say was that it was intended to “extract value from assets”, whatever that means.

Whether this will result in an attractive investment remains to be seen. I guess it is back to the old Joel Greenblatt question of what’s in it for whom. For that, as always, we are going to have to read their official filings of just exactly what they are going to do.

On the surface of it, midstream operations can provide good cash flow and stability since owning the pipes and storage and delivery facilities means you collect your fees no matter what the stuff going though them is costing at the moment. If you don’t screw it up, you should be able to keep cashing the checks for a long time. That should be good.

Will we get a chance to get in on this stock spin-off at a good price? Only time will tell.

At the moment, I can’t see why the new company should be undervalued out of the box. Maybe just size or energy investors not really wanting to be in the midstream part of the business will cause them to unload the new shares. Maybe if it comes out at an MLP that structure will depress the early prices. Who knows? Keep watching.

As so often happens, maybe I’m missing something. Read the story about the Chesapeake Energy stock spin-off plans.

Tags: CHK, mlp, stock spin-off, stock spin-off investing, Value Investing