On October 29, 2018, Honeywell (HON) spun off, Resideo (REZI), its home products (thermostats, fire protection, etc.) and distribution business (security, fire protection, etc.) REZI has declined 30% since the spin-off. By my math, REZI trades at 7.2x 2019 EBITDA. I think a more appropropriate valuation would be 9.0x ‘19 EBITDA which would imply a $27 stock price and ~37% upside (note I do not have the conviction to make REZI an official recommendation). REZI reported Q3 results this week and confirmed its outlook for 2019: at least 4% top line growth and 10% EBITDA margins. I posted initial thoughts on Seeking Alpha and posted my notes from a conversation with the CFO here (for members). Barron’s has written up REZI twice here and here.
On November 2, 2018, Trinity Industries, (TRN), spun off Arcosa (ACA). ACA consists of three segments: Inland Barge, Construction Products, and Energy Equipment. Revenue has been declining due to a cyclical downturn in the inland barge market. However, guidance implies EBITDA growth in 2019 due to a turn around in the Inland Barge business. With 12% EBITDA margins and a 10% return on invested capital, ACA is not a great business and I was waiting to see if there would be indiscriminate selling. Surprisingly (at least to me), ACA has performed very well out of the gate as it is up 7% since the spin-off.
On November 13, 2018, EQT Corp (EQT), spun off Equitrans Midstream (ETRN). I posted initial thoughts here. ETRN is a midstream energy company. Midstream companies are more attractive than upstream energy companies (companies that drill for oil/gas) in my opinion as midstream companies are more reliant on the flow of the underlying commodity than the price. For instance, 54% of revenue is generated by fixed contracts. It also trades at an implied 2018 dividend yield of 8.3% and from my preliminary work, that dividend seems safe.
BGC Partners (BGC), announced that it will spin off Newmark Group (NMRK), a commercial real estate services firm, on November 30, 2018 (first day of trading will be December 3, 2018). NMRK originally IPO’d ~15% of its shares at $14/share. It is currently trading at ~$9.24. BGCP will be distributing its remaining shares in NMRK to share BGCP shareholders (0.4613 shares of NMRK per share of BGCP). NMRK’s competitors are CBRE, JLL, and CIGI which trade at 8.6x ‘19 EBITDA.
Spin-off News and Links
frontdoor, inc (FTDR), a ServiceMaster’s recent spin-off, recently reported disappointing Q3 earnings and has since plummeted 37%! On September 11, 2018, FTDR had issued guidance for ~20% EBITDA margins in 2018. When FTDR reported earnings in November, they decreased EBITDA guidance to ~17.5%. Not good for management credibility! The stock is trading at 12.8x ‘18 EBITDA which seems reasonable. Here is the bull case as outlined on Value Investor Club (this definitely contributed to FTDR’s run up in the when issued market). Here’s another bullish article on Seeking Alpha.
Novartis (NVS) filed its 20-F for its planned spin-off of Alcon, its eye care unit. You can find the filing here. The spin-off is expected to occur in the first half of 2019, and Alcon will trade under the ticker ALC.
Zayo (ZAYO) announced on November 7, 2018, that it will split into two companies. Zayo Infrastructure will be fiber-focused infrastructure provider. It will have ~$1.7BN in revenue and a ~55% EBITDA margin. Zayo Enterprise will have a product portfolio and customer base centered around higher bandwidth connectivity to enterprise locations. It will have $1.0BN in revenue and a ~30% EBITDA margin.
On November 15, 2018, Post Holdings (POST) announced that it would IPO 20% of its Active Nutrition Business in the second half of 2019. The Active Nutrition Business consists of ready-to-drink protein drinks, protein powders and nutritional supplements. The business has grown sales at a CAGR of 30% since 2014 driven by consumer trends toward convenience, health, and higher protein consumption.
Yielding to pressure from activist investor, Owl Creek, marine focused Brunswick Corp (BC) will spin off its fitness equipment business in Q1 2019. Here is a good article that provides some background on both businesses and the rationale for the spin-off.
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