Spinoffs are a classic hunting ground for value investors. The characteristics of a spinoff provide the fertile spots. Company A spins off Company B to existing Company A shareholders. The shareholders of Company A are invested in Company A, not company B. So, typically when the new company shares are spun out, the existing shareholders aren't interested; they want the company in which they originally invested.
The selling that often occurs with the company that is spun off is precisely what bargain hunters are after. The price becomes distorted in relation to the underlying business. Such an opportunity appears to exist with Remy International (REMY), a $600 million manufacturer and supplier of electrical automotive components. At the end of last year, Fidelity National Financial (FNF) completely spun off its remaining interest in Remy.
Remy was launched in 1896 and in 1912 was owned by General Motors (GM). Today, the company is the leading global manufacturer of aftermarket and original equipment electrical components such as starters, alternators, and other components.
Unlike many spinoffs that get saddled with a lot of debt, Remy has a sound balance sheet. Net debt is approximately $180 million compared with nearly $500 million in 2009. The debt level today is nearly 1x adjusted earnings before interest, taxes, depreciation and amortization compared to nearly 7x adjusted EBITDA back in 2007.
Remy's operations should continue to grow strongly as headwinds from the auto industry continue to look robust. In addition, Remy's international business -- specifically in China -- continues to grow at a fast clip. By 2017 the company expects generate over $3 in cash earnings per share compared with $2.84 in 2013. Shares today trade for $20, or at 25x earnings. If one were to apply a 15 multiple on 2017 numbers, the business would be worth nearly $50 a share in two years. Consider that Motorcar Parts of America (MPAA) trades for 50x trailing earnings.
I suspect that once the selling pressure from Fidelity shareholders subsides, the growth in Remy will begin to attract an array of investors.