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Elanco Animal Health (ELAN), the animal services division of Eli Lilly (LLY), IPO’d last week. It priced at the high end of its range and then traded up 50%! LLY IPO’d ~20% of the company and plans to distribute the remaining ~80% of the company to LLY investors in ~6 months. Attractive attributes of the company include:
- Animal health is defensive (attractive at this point of business cycle)
- Steady mid-single-digit top line growth expected
- Significant margin expansion potential
I wouldn’t chase shares in the mid $30’s and believe investors will have a better entry point as the market prepares to absorb the ~80% distribution from LLY in 2019. If you want additional details, you can read my full analysis here.
KLX Energy Services (KLXE), a spin-off from KLX Inc, started trading last week (September 17). It has been relatively flat since the spin-off. KLXE is a diversified energy services provider focused on the U.S. It is trading at 5.4x ‘18 EBITDA vs. peers at 8.1x. I provided some additional thought on the opportunity for members here.
On September 26, 2018, Fortive’s Automation and Specialty Business, will complete its merger and split off. Fortive (FTV) shareholders who elected to exchange their shares will receive shares in Altra Industrial Motion (AIMC). AIMC is currently trading at $42.15 and is trading at 11.2x pro forma EBITDA (including synergies). Over the past 5 years, AIMC has traded at an average EV/EBITDA multiple of 10.3x.
On October 1, 2018, Garrett Motion (GRX), a Honeywell (HON) spin-off, will begin trading. GRX’s primary business is selling turbochargers to automobile manufacturers. GRX is in a cyclical business and will have significant long term liabilities ($1.7BN of debt and $1.7BN of obligations to Honeywell to cover asbestos and tax liabilities). If you consider obligations to Honeywell equivalent to debt, GRX has a debt to ‘17 EBITDA ratio of 5.7x. It’s closest peer, Borgwarner, trades at an EV to EBITDA multiple of 6.9x. GRX is trading in the when issued market under the ticker GTX-WI at $15.90 which implies an EV / ‘17 EBITDA multiple of 7.7x. The distribution ratio will be 1 share of GRX for every 10 HON shares owned. Regular way trading begins in Monday, October 1. For more information, check out our resource page.
On October 1, 2018, frontdoor, inc (FTDR), a ServiceMaster (SERV) spin-off, will also begin trading on Monday, October 1. FTDR is the leader in the appliance warranty market. It’s a good business with ~20% EBITDA margins, an attractive ROIC profile and strong revenue growth. The negatives on FTDR are that it is exposed to the housing market and claims can be lumpy. SERV which trades at 15.5x forward EBITDA, is spinning FTDR off in the hopes that the remainco (main business is Terminix) will trade closer to its competitor Rollins (ROL) at 35x forward EBITDA. FTDR is trading in the when issued market under the ticker FTDRV at $39.25 which implies an EV / ‘18 EBITDA multiple of 16.9x. Regular way trading beginning Monday, October 1. For more information, check out our resource page.
Recently Announced Spin-offs
Since last month’s newsletter, there have been 3 new spin-off announcements. Remember to check our stock spin-off calendar for the latest information on spin-offs that have been announced.
On September 4, 2018, Loblaw Companies (TSX:L) announced that it is spinning off its 61.6% interest in Choice Properties Real Estate Investment Trust (TSX: CHP.UN). Under the transaction, George Weston Limited (TSX: WN) will receive Loblaw’s 61.6% interest in Choice Properties and Loblaw shareholders will receive 0.135 of WH shares for every share of L.
On September 13, 2018, Altagas (TSX:ALA) announced it will be spinning out a portion of its Altagas Canada business which is focused on Canadian rate-regulated natural gas distribution utility assets and contracted wind power in Canada, through an IPO. After the IPO, Altagas expects to continue to hold a significant position in Altagas Canada. The transaction is expected to take place in Q4 2018.
On September 21, 2018, Nxt-ID (NXTD) announced that its intends to spin off its payments, authentication and credential management business. The transaction is expected to occur in Q4 2018.
Spin-off News and Analysis
I posted a spin-off case study on Arlo (ARLO), a recent IPO/planned spin-off from Netgear (NTGR). The case study walked through the analysis and mechanics of going long NTGR (Netgear still owns ~80% of ARLO) and short ARLO to capitalize on a valuation discrepancy between the two companies. I also included an excel template that can be used to monitor the attractiveness of the NTGR/ARLO opportunity or other pair trades. Check out the article here.
KAR Auction Services (KAR) is spinning off its Insurance Auto Auction salvage business in Q1 2019. The thesis for the spin-off is that the Insurance Auto Auction business (high margin, fast growth, defensive) will warrant a higher multiple trading on its own (auction peer, Copart, trades at 18x EBITDA). Check out this excellent overview of the insurance auto auction industry.
Residio, Honeywell’s second 2018 spin-off (expected to occur in Q4 2018), is focused on ADI distribution (security, fire protection) and Home products (thermostat, smoke detector, etc.) Check out 20 pages (!!) of notes on the spin-off from Geoff Gannon of Focused Compounding.
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