Spinoff investing is a proven way to create profits in the stock market. We have identified 4 spinoffs that are poised to create profits in 2016. But first, let’s take a closer look at spinoffs and why they can be very lucrative to stock market investors.
What is Spinoff?
Spinoffs have a history of outperforming the stock market. A spinoff is what happens when a company decides to turn a portion of itself or a division into its own separately traded entity.
The reason spinoffs generally outperform the overall stock market is principally the fact that they hit the ground running. In other words, they are already established, usually have revenue, customers and all the factors often lacking from many IPO’s.
These facts can make investing in newly formed spinoffs, a very lucrative endeavour.
Many analysts called 2014 ,”the year of the spinoff.” Things were even bigger in 2015 with 79 spinoffs completed worth a total of $244.9 billion per Dealogic. Dealogic went on to state that 2015 posted the highest value of spinoffs in the last 20 years.
How Are Spinoffs Conducted?
The most common is for the parent to pass on 100% of its concern in the subsidiary to its own investors as a stock dividend. Usually, shareholders are not required to pay tax on the shares provided until they are sold.
The second common method for spinoffs is by allowing its investors to trade their own shares for stock in the new company. Investors are often incentivized to do this with a discounted price.
A third technique is an equity carve-out, or fractional spinoff, where a company divests a minority share in a subsidiary (usually less than 20%) in an IPO.
In these cases, the spun-off firm creates greater independence but still benefits from the parent’s expertise and resources. Carve-outs usually result in full spinoffs later on.
Why Spinoffs Create Investor Profits
Spinoffs assist the management of the new firm improve their focus on the core businesses. They also allow the new company to pursue opportunities that were previously not acceptable to the original corporate charter.
Multiple academic and financial industry studies have made clear that spinoffs can pay off for investors.
One example, released by Credit Suisse in 2012, studied companies involved in spinoffs over the last 17 years. It revealed that, on average, spun off firms outperformed the S&P 500 by 13.4% in the first 12 months, while parents beat the index by 9.6%.
Another primary reason that spinoffs create profits is a shift in investor sentiment about what constitutes a solid investment.
Back in the 1960’s and 1970’s, investors believed that large company groups provided the best shareholder value. This belief led to the growth of the mega-corporate conglomerate of that era.
Today, the opposite is widely embraced by investors. The opposite is that companies should have a narrow and singular focus to best extract profits from the particular niche. This is why spinoffs and their tighter focus.
Here Are 4 Spinoffs You Need To Know For 2016
- Journal Media Group (NYSE:JMG)
In April 2015, per the press release, EW Scripp completed the merger of its broadcast assets with those of Journal Communications and the spinoff of the respective newspapers.
Scripps and Journal simultaneously spun off and merged their newspaper operations to form Journal Media Group and immediately thereafter merged their broadcast operations, making Scripps one of the nation’s largest independent TV station owners.
“Beginning today, the platform for our quality journalism and information products is a diverse group of local media brands – television, radio and digital – and we will reach nearly one in five U.S. television households,” said Rich Boehne, Scripps chairman, president and CEO. “We have a big voice that we will continue to use to create and distribute great content and marketing messages that build brand and sales for our advertisers.”
Shareholders of Scripps class A and common voting shareholders of record as of close of business on March 25, 2015, today received a special one-time cash dividend of $1.0297 per share and .25 share in Journal Media Group for each Scripps share they owned.
Shares of the spinoff are higher by about 0.25% in 2016.
2 FirstService Corporation ( Nasdaq:FSV)
This company was spun off in June, 2015 from its following the split of its former parent’s residential and commercial (Colliers International Group property services businesses.
The Company offers property services through two service platforms, including FirstService Residential and FirstService Brands. FirstService Residential manages approximately 7,000 properties in residential communities.
In addition to property management services, FirstService Residential provides other services in various areas, such as on-site staffing, including building engineering and maintenance, full-service amenity management, security, concierge and front desk personnel, and landscaping; banking and insurance products, and energy conservation and management solutions.
FirstService Brands provides property services through seven brands, including Paul Davis Restoration, CertaPro Painters, California Closets, Pillar to Post Home Inspectors, Floorcoverings International, College Pro Painters and Service America. The Company also provides services related to energy, insurance, financial products and loan placement.
Shares are lower by nearly 9% this year due to the overall market weakness.
However, the company posted solid results for its first year and has high expectations for the future.
CFO Jeremy Rakusin stated, “Revenues were $316 million, up 12%, EBITDA margin hit 7.1%, which is 240 basis points greater than the margin in Q4 of last year, and earnings per share came in at $0.28, more than double the number we reported in the fourth quarter of 2014.
So very strong results which were right in line with our expectations. Again, this quarter, I want to highlight organic growth, which in local currency came in at 10%, 9% FirstService Residential and almost 14% for FirstService brands. Organic growth at this level is a great reflection on our operating strategies and on the hard work of our operating teams across the businesses. It is very gratifying to see it come through. We are clearly winning market share at both of our divisions.
- Armstrong World Industries (NYSE:AWI)
This spinoff is slated to occur in 2016. The company plans to spinoff its flooring business into a separate entity.
That the tax-free spin-off of the floorings unit is expected to close in the first quarter of 2016.
“There is little existing overlap between the businesses, and we expect the separation to create minimal incremental operating expenses,” Chief Executive Matthew Espe said in a statement on Monday.
The stripped down Armstrong World will be led by Vic Grizzle, the head of the ceiling business, the company said.
The spun-off Armstrong Flooring will be led by Don Maier, current head of the flooring business.
Armstrong World did not specify what role, if any, its current chief executive, Matthew Espe, would play after the spinoff.
“We anticipate improving market conditions in the U.S. will support modest sales growth despite some anticipated pressure from foreign exchange in our international operations,” said Chief Financial Officer Dave Schulz.
Armstrong World exited its European flooring business in December due to cooling housing demand on the continent.
Evercore Partners is advising the company on the separation process.
It’s important to note that Armstrong’s ceiling business created over 50% of the company’s 2014 revenue. In addition, it accounted for nearly 75% of the 2014 EBITDA in the same year.
This is definitely one for your spinoff watch list!
- Vista Outdoor (NYSE:VSTO)
Shares of this 2015 spinoff are higher by 1.26% in 2016 and up nearly 5% over the last 52 weeks.
Vista Outdoor ,a leading manufacturer and seller of both shooting sports and outdoor recreation products, spun off from Alliant Techsystems in February 2015, as part of the merger with Orbital Sciences Corporation to form Orbital ATK.
The company posted solid results in the third quarter with a year-over-year increase of 17% in revenue with 7% sequential revenue growth.
It posted third-quarter year-over-year increases and gross profit of 25% and adjusted operating profit of 15%. Adjusted EPS was also up 15% year-over-year.
As a result of our strong performance, and improvements in the marketplace, we’ve raised our full year guidance for sales and adjusted EPS. Stephen Nolan will share more on market conditions and our outlook in just a moment when he provides more detail on our financial results.