Throughout my career, I have done very well by investing in spinoffs. A certain magic seems to be released when a smaller business breaks free from a larger enterprise. Managers are allowed to focus on core competencies, exploit new opportunities and make structural improvements that just did not seem to happen when they were part of more bureaucratic organization with different goals.
Some spinoffs I received as part of owning the larger organization prior to the split. Phillips 66 (PSX), which I profiled yesterday, is an example. PSX was spun off from ConocoPhillips (COP) in April. Like a lot of spinoffs, it sold off at first as a lot of holders of Conoco wanted to own the production business. However, since it hit a bottom soon after the split, the shares are up some 15% and I continue to hold the shares.
In other cases, I successfully acquired shares of a spinoff a year or two into their journeys as separate companies. I have found this is a good time to invest because management has had time to put their imprint on the new company and analysts have started to cover the names. Here are a couple of recent spinoffs that look compelling from a valuation point of view and should do well over the coming years.
The Babcock & Wilcox Company (BWC) provides clean energy technology and services for the nuclear, fossil, and renewable power markets worldwide. The company was spun out from McDermott International MDR in 2010.
Four additional reasons BWC is a good value at under $25 a share:
- The stock is trading near the bottom of its historical valuation range (two years) based on its P/S, P/E, P/CF and P/B. BWC is priced at less than 12x forward earnings.
- Analysts project the company will increase revenues by 12% to 13% for both fiscal-year 2012 and fiscal-year 2013. The stock has a five year projected PEG below 1 (.83).
- The median price target by analysts on BWC is $32 a share. Plus, an activist U.S. hedge fund, Mason Capital Management, added more than $10 million in additional shares in June and July.
- The company has solid balance sheet with over $350 million in net cash on the books (approximately one-eighth of its market capitalization). The stock also looks like it bottomed recently and crossed over its 200-day moving average in late June (See the chart below.)
Marathon Petroleum Corporation (MPC) is similar to Phillips 66 as it was recently detached from a large oil company, Marathon Oil (MRO). The company operates six refineries in the Gulf Coast and Midwest regions of the U.S., as well as more than 8,000 miles of pipelines and 5,000 gas stations.
Four additional reasons MPC offers solid upside from $45 a share:
- Consensus earnings estimates for fiscal-year 2012 and fiscal-year 2013 have improved 12% to 15% over the past three months.
- Trading below 7x earnings and 20% of annual revenue, the stock is cheap. It also provides a solid 2.2% dividend yield, which I would expect to rise consistently over the next few years given the company's robust cash flow and low payout ratio.
- MPC has handily beat earnings estimates for three of the last four quarters and analysts expect to see 7% revenue growth in fiscal-year 2013.
- The median price target on MPC by the 12 analysts who cover the stock is $53. Credit Suisse has an Outperform rating and a $60 price target on the stock.