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Steven Chen
Steven Chen
Articles (117)  | Author's Website |

Spinoffs: A Good Place to Discover Long-Term Value

A spinoff could lead to higher capital efficiency, more growth opportunities and more incentivized management

Research has found that spinoff stocks, on average, produce market-beating returns over time. The spinoff, as a type of divestiture, works opposite of mergers and acquisitions, leading to potentially higher capital efficiency and more growth opportunities. Why? The spinoff business, post the transaction, gains greater flexibility to deploy its resources on its operations and investments without limitations imposed on it by the parent company. Hence, value could be unlocked for long-term shareholders.

One of the most well-known spinoff transactions in recent memory was the divestiture of Philip Morris International (NYSE:PM) from Altria (NYSE:MO), which enabled the former, with more freedom outside the constraints of U.S. corporate ownership, to pursue sales growth in emerging markets. Meanwhile, the new Altria had room to optimize its cost structure with a focus on the U.S. market. As you can see below, Philip Morris is the notable perennial outperformer here in terms of return on assets.

It is not uncommon that the management team of the spun off entity receives financial incentives, such as shares and options and, therefore, are motivated to build the long-term success of the company. Additionally, we often observed that through spinoffs, companies tend to carve out the good business (or assets) from the mediocre ones, spawning even greater long-term investment opportunities. Take Omega Flex (NASDAQ:OFLX) as an example. The long-standing leader in the so-called flexible metal hose niche was once a subsidiary of Mestek (MCCK), an HVAC and metal forming equipment manufacturer, until being spun off in 2005. Management said the main reason for the break-up was to get Omega Flex out of the internal competition for capital at the parent company. As a result, the high-growth, capital-light, cash-rich business at Omega Flex can access the capital markets to make better strategic decisions itself.

According to the chart below, Omega Flex has maintained its annual return on assets above 10% every year since the spinoff, compared to its ex-parent’s struggle to break even (before de-listing).

Checking the ownership structure, we see that Kevin Hoben, chairman and CEO, and Mark Albino, president and chief operating officer, respectively hold approximately 10% and 4% of the total shares outstanding as of the latest filing.

Below, we list a couple of recent value-generative spinoffs that have earned high returns on capital for their shareholders.

  • VF Corp.(NYSE:VFC) spun off Kontoor Brands (NYSE:KTB) in 2019.
  • Wyndham Destinations (NYSE:WYND) spun off Wyndham Hotels & Resorts (NYSE:WH) in 2018.
  • Hilton Worldwide (NYSE:HLT) spun off Hilton Grand Vacations (NYSE:HGV) in 2017.
  • ConAgra Brands (NYSE:CAG) spun off Lamb Weston (NYSE:LW) in 2016.
  • YUM! Brands (NYSE:YUM) spun off Yum China Holdings (YUMC) in 2016.
  • Fiat (FCAU) spun off Ferrari (RACE) in 2016.
  • EBay (EBAY) spun off PayPal Holdings (PYPL) in 2015.

And also some anticipated spinoffs that we find interesting:

  • The Gap (GPS) to spin off Old Navy.
  • United Technologies (UTX) to spin off Otis Elevator.
  • ThyssenKrupp AG (XTER:TKA) to spin off ThyssenKrupp Elevators.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Philip Morris.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


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