Sizing Up a Pair of Spinoffs

 | Sep 16, 2013 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

cst

,

vlo

,

vac

,

mar

With the Dow Jones Industrial Average and S&P 500 near all-time highs again after last week's market rally, investors must be creative to find undervalued plays. I believe value can be found in spinoffs as the category has historically outperformed the overall market.  The primary reason for this is that management is more focused on improving the company's business fundamentals once it leaves a larger conglomerate.

I generally like to wait at least a few months after a company is spun off to give current shareholders in the parent time to sell their shares in the newly spun company, as most seem to prefer to stick with the larger company. I am currently looking at two spinoffs that seem undervalued, and both have seen insider buying recently.

CST Brands (CST) operates more than 1,000 gas stations/convenience stores in the U.S. and around 850 more in Canada.  It also operates just under 600 fuel-only sites. CST was recently spun off from Valero (VLO) in April.

The company has an enterprise value of $2.9 billion.  If one puts a conservative $2 million per store replacement value on its approximately 1,900 gas/convenience stores, the stock is selling at a discount of more than 30%. This calculation does not put any additional value on the company's 600 or so fuel-only sites.

On a more traditional valuation basis, the stock seems undervalued at less than 5x operating cash flow and 20% of annual sales.  The company has a strong balance sheet and an insider bought more than $140,000 worth of new shares last month.  CST's domestic locations are located in fast-growing population centers in the Southwest (more than 60% of its U.S. stores are in Texas, which is enjoying robust economic growth on the back of the domestic energy boom).

Marriott Vacations Worldwide (VAC) develops, markets and manages vacation properties in worldwide. The company was spun out from Marriott (MAR) late in 2011.  It has easily surpassed bottom-line expectations each of the last three quarters.  Consensus earnings estimates for both 2013 and 2014 also have both gone up approximately 3% over the past two months.

From a price-to-revenue basis, it is selling at a significant discount to competitors like Diamond Resorts International (DRII).  The company should do well as the economy continues to improve slowly and revenue growth is projected to accelerate in 2014.

Marriott Vacations should attract additional analyst coverage as it grows, and the stock is some 25% below the median price target held by the eight analysts that currently cover the shares.  The company has a solid balance sheet and an insider picked up more than $300,000 worth of new shares in late August.

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