Spin-offs with Insider Buying (November 2022)

I recently scanned my spin-off watch list for insider buying and found 4 stocks that are worth highlighting.

Let’s go in alphabetical order…

Conduent (CNDT)

Conduent is a business processes outsourcing company that was spun off from Xerox in 2016.

It hasn’t had much success as a public company…

It has three segments: Commercial (50% of revenue, 30% of EBITDA), Government (32% of revenue, 56% of EBITDA), and Transportation (18% of revenue, 14% of EBITDA).

It previously planned to spin off its Transportation division, but has put those plans on hold given the market volatility.

The stock looks very cheap trading at 5.6x EBITDA and 8.0x FCF.

Insiders have been gobbling up shares…

Conduent does have a relatively high debt load (net debt to EBITDA of 2.8x) but it has no meaningful maturities until 2026 (and the majority of debt matures in 2028 or beyond).

And last but not least, Carl Icahn owns 18% of shares.

The one thing that is holding me back is revenue has been shrinking continuously, Over the past 20 quarters, revenue has grown y/y just once.

Douglas Elliman (DOUG)

Douglas Elliman is a spin-off of Vector Group.

It’s one of the largest residential real estate brokerage firms and is a major player in luxury markets.

The stock initially sold off due to indiscriminate selling pressure before stabilizing.

It has sold off again recently due to lower real estate activity (lower rates).

One concern that I had at the time of the spin-off was the following…

What are “normalized” earnings?

At the time of the spin-off, revenue and EBITDA was spiking.

But I knew those market conditions wouldn’t last forever.

In the most recent quarter, DOUG generated EBITDA of $0.1MM down from $28MM last year.

The good news is that the company has no debt and $193MM of cash on its balance sheet ($58% of market cap).

It’s trading at an EV/LTM EBITDA multiple of 2.7x. It’s cheap on an absolute basis and versus peers (COMP).

And insiders have been aggressively buying shares….

The one thing that is a little concerning about DOUG is the volatility of results. They are all over the place.

I also would love to see management buy back some stock. I’m concerned that management would rather spend the money on acquisitions.

Enhabit, Inc (EHAB)

Enhabit is a home health and hospice company.

It was spun out of Encompass Health (EHC) in July ‘22.

The stock is already down 49%!

I initially published a deep dive and estimated the stock was worth $30 versus EHAB’s initial trading price of $25. Some upside but not compelling.

Fast forward to today, and the stock is trading at $13.

What caused the sell off?

First, we are in a bear market and all the home health and hospice players have sold off.

Second, Enhabit has seen revenue declines due to sequestration (automatic 2% reimbursement cuts per year) and lower hospice volumes.

Margins have also taken a hit due to inflation and staffing constraints.

But over the long-term, the business outlook is solid as home health is a lot cheaper than traditional care.

From a valuation perspective, the stock looks cheap.

EHAB trades at 8x forward EBITDA and 6.4x FCF.

Meanwhile, a comparable company, Amedisys (AMED), is trading at 14x EBITDA and 13x FCF.

Another comparable company, LHC Group (LHCG), is in the process of being acquired by UnitedHealth Group for 20x EBITDA.

Meanwhile, insiders have been buying like crazy…

Vontier Corporation (VNT)

Vontier was a spin-off from Fortive (FTV) in 2020.

The company makes money selling fuel dispensers and point of sale systems, fleet tracking systems, and auto mechanic tools.

The company has “Danaher in its DNA” as Fortive was a spin-off from Danaher.

Vontier generates high returns on invested capital and requires minimal capex.

Two years have passed since the spin-off so Vontier is eligible to be acquired without triggering any adverse tax consequences

The stock looks cheap, trading at 8x EBITDA and 8x FCF.

Insiders have started buying aggressively.