Spin-offs tend to have a stellar rate of return, according to research.
One study in particular, published in The Journal of Financial Economics in 1993, showed that spin-offs beat the S&P 500 index by 30% over the next three years of trading. Their parent companies surpassed the index by 18%.
GuruFocus research on 55 spin-offs confirmed that the outperformance still happens.
“The longer we held the spin-offs, the more we could beat the market. Fifty-two weeks after being spun off, the spin-offs on averagely outperformed the market by 84.28%, which means if we invested $1,000 in spin-offs and held them for one year, usually it would generate $842.8 more than if we invested $1,000 in SPY,” data analyst Vera Yuan said.
Spin-off activity was lower in 2017 compared to 2016. In 2017, 24 U.S. companies engaged in spin-offs, and in 2016, 36 did. For the 2017 companies, 13 have posted gains since their spin-off date, while 10 have declined and one was flat. The five best-returning spin-offs of 2017 were:
Bioverativ Inc. (BIVV, Financial): 133.4%
Weibo Corp. (WB, Financial): 82.7%
Hilton Grand Vacations (HGV, Financial): 78.6%
DXC Technology Co. (DXC, Financial): 51.8%
Varex Imaging Corp. (VREX, Financial): 37.3%
Bioverativ Inc. (BIVV, Financial): 133.4%
Bioverativ spun off of Biogen on Feb. 22, 2017, becoming an independent biopharmaceutical company focused on hemophilia, cold agglutinin, among other uncommon blood disorders.
Bioverativ has two therapies: Eloctate, for the treatment of hemophilia A, and Alprolix, for use in hemophilia B. Seven more wait in its pipeline at various stages of progress.
The company already found a buyer in global biopharmaceutical company Sanofi (SNY, Financial). On Jan. 22, the two companies announced Sanofi would buy Bioverative for $105 per share in cash, or a total of $11.6 billion.
Weibo Corp. (WB, Financial): 82.7%
Parent company SINA Corp. announced a reduction in ownership of Weibo Corp. on June 8, and investors have watched the stock skyrocket since.
Weibo, the largest social media platform in China, resembles the U.S.’s Twitter (TWTR, Financial) and has a $30.32 billion market cap on its own. In the deal, SINA distributed to investors 10 shares of Weibo for every one share of SINA they held, decreasing SINA’s equity stake in Weibo to 46% from 49% but retaining an ownership stake. Weibo officially spun off Sina in 2014, making it an official subsidiary.
Weibo generated net revenues of $1.15 billion in 2017, reflecting growth of 75% from the previous year. The company benefited from $996.7 million in advertising and market revenues, which escalated 75%, and value-added services of $153.3 million, which leaped 81%.
About 79 million more monthly users participated on Weibo in the fourth quarter, bringing its total to 392 million.
"We are pleased to announce that we have achieved an important milestone as our total revenues for full-year 2017 surpassed $1 billion. Revenues from SMEs, key accounts and non-advertising all saw robust growth, while our profit and user base reached new highs." said Gaofei Wang, CEO of Weibo.
Hilton Grand Vacations (HGV, Financial): 78.6%
The separation of Hilton Grand Vacations from its parent Hilton Worldwide Holdings took place on Jan. 4, with the young company focusing on timeshare and resort management.
"Hilton Grand Vacations is a premier operator and rapidly growing company in the timeshare industry," said Mark Wang, president & CEO, Hilton Grand Vacations. "We are focused on adding value for our members, continued net owner growth, and delivering a strong return on our capital efficient business."
In 2017, Hilton Grand Vacations saw revenue growth across its three segments: Real estate sales and financing; resort operations and club management; and contract sales. Net income soared year-over-year to $327 million, or $3.28 per diluted share, from $168 million, or $1.70 per diluted share, though 2017 included a deferred tax benefit of around $132 million.
The company appears set for continued growth with the addition of its first resort in Japan. The development will be a 132-unit timeshare report with roughly 300 rooms, located on Sesokojima Island, Okinawa and set to open in 2020.
DXC Technology Co. (DXC, Financial): 51.8%
DXC Technology came into existence through the merger of CSC and the enterprise services business of Hewlett Packard Enterprise, creating an IT services company with 6,000 clients across 70 countries. The deal reached completion on April 1.
“With the successful close of our transaction, we are standing up a company that is ideally suited to meeting the needs of a rapidly changing technology marketplace,” Mike Lawrie, DXC Technology chairman, president and chief executive officer said in a statement.
For the period ended Feb. 8, DXC Technology delivered $779 million in net income, including a $341 benefit from tax law changes, compared to $37 million in the same period of 2016. Diluted earnings per share totaled $2.72 compared to 22 cents.
DXC Technology is also engaging in further deals. In October, it announced it would combine its U.S. public sector business with Vencore Holding Corp. and KeyPoint Government Solutions, forming a public company that specifically for government clients. The combined company will have around $4.3 billion in revenues and offer cybersecurity, cloud engineering and other technology services.
Varex Imaging Corp. (VREX, Financial): 37.3%
Varex Imaging completed its spin-off from Varian Medical Systems on Jan. 30, 2017, with the parent company giving investors 0.4 of a share of Varex stock for each share they owned.
The newly created company, Varex, deals in x-ray and imaging components like tubes and digital flat panel detectors used in x-ray systems. Its products are used in medical as well as industrial and security industries.
Varex Imaging has a $1.8 billion market cap. For its first quarter of fiscal year 2018, Varex announced a 12% increase in revenues, to $176 million, missing the company’s expectations.
"Revenues grew for the first quarter, but were short of our projections. The acquired imaging business performed well and revenues from that business exceeded our expectations. At the same we had a decline in sales from several digital detector customers as they managed inventory levels to better match timing of their shipments to later in the year, which also led to a lower operating margin rate. With more than 85% of our anticipated revenues for the year identified by current customer-provided orders and forecasts, we remain confident in our expectation for full year revenues to grow 13% to 14% over the prior year," Sunny Sanyal, CEO of Varex Imaging Corp., said in a statement.
Its net earnings were virtually flat, at $11 million in the first quarter, or 30 cents per diluted share, compared to $11 million, or 29 per diluted share in the prior-year quarter.
Room for growth may exist in its benefits from the corporate tax law rate, which dwindled to 24-25% for full fiscal year 2018. The company plans to use the extra cash to grow investments in technology, capital improvements and its employees.
The company is expecting revenue growth of 13-14% for the full fiscal year, with adjusted net earnings of $1.82 to $1.92.
See more spin-off stocks in the List of Spinoff Stocks here.
