A story of acquisitions and breakups
ITT Corporation has been around for almost one century. In fact, it was founded in 1920 with the name of International Telephone & Telegraph. During the 1960s and 1970s, the company derived its growth from a long series of acquisitions, turning itself into an enormous conglomerate. In 1986 it sold the telecom assets (therefore separating its activities from its name) and in 1995 it split up into 3 separated publicly held companies (at the time of split the divisions were: insurance, industrial, and hotel/entertainment).
After the split (in the form of a double spinoff of the insurance and entertainment businesses), the company took the name of ITT Industries, Inc., which was once again changed to ITT Corporation in 2006 (actually, this was the post-spinoff name of its hotel/entertainment business, subsequently acquired by another company and delisted).
The recent (multiple) spinoffs
At the beginning of last year, the company announced its plans to separate into... guess what?... 3 independent publicly traded companies!
On October 31, 2011, ITT spun off its Defense and Information Solutions business into a company named Exelis, and its Water Technology and Services business into a company named Xylem.
As we’ll see later, what ITT retained was its “pure” industrial division, so we can think of this one as just a step further in the process that started with 1995 split. As Joel Greenblatt often remarks in his first book, a spinoff deal can often provide a profit opportunity (see my latest article on this topic), so analyzing Exelis and Xylem financial prospects could be a good start.
Anyway, I’d like to focus on ITT Corporation (the parent company), because I think there are some interesting aspects that could not be already priced in..
The parent company
The post-spinoff ITT is composed by 4 divisions:
Let’s have a look at how the spinoff process has been carried out, especially referring to cash and debt levels.Going through ITT SEC filings, I found this 8-K report filed on November 4, 2011, confirming (among other things):
1) “the transfer, upon the Spin-off, of certain assets and liabilities by ITT to Exelis and Xylem. These assets and liabilities relate primarily to postretirement benefit plans for which Exelis and Xylem became the plans' sponsors upon completion of the Spin-off”
2) “the post-separation capital structure of ITT, including (i) the 1:2 Reverse Stock Split, (ii) the receipt of net contributions by Exelis and Xylem to ITT of $104 million and $555 million, respectively, and (iii) the retirement of $1.3 billion of indebtedness of ITT [..]”
In a few words, ITT transferred to Exelis and Xylem most of the pension liabilities, and its spinoff subsidiaries transferred (in total) $659 million to the ITT parent company.
In addition, also thanks to this transfer, ITT was able to retire $1.3 billion of debt, practically turning itself into a debt-free company and driving the company Debt/Equity ratio from 0.74x to zero (pre and post-spinoff).
Another aspect worth noting is that this is a quite unusual spinoff: ITT pure industrial business was smaller than its spinoff divisions (see the picture below).
In these cases, as Mr. Greenblatt suggests, it will be more helpful to think of the parent company as the (real) spinoff.
This is also confirmed, for example, by the fact that, on October 31, 2011 (the spinoff date), Xylem took the place of ITT Corporation in the S&P 500 index (Xylem capitalization is, as we write this article, much greater than ITT cap).
This means that most of institutional portfolios will probably add Xylem stock to their holdings rather than ITT.
Value investors love this kind of circumstances.
ITT Corp. latest financial results
On February 29, 2012, ITT released its 4th quarter and 2011 year-end financial results, showing strong improvements in all of its four divisions, in particular in the Industrial Process and Control Technologies businesses.
One of the best achievements was a 19% growth in emerging markets (especially China and Brazil).
Most of ITT businesses are cyclical, so these results don’t come completely unexpected (although ITT management plays a key role in this success), and, as the economy recovers, we could expect ITT still improving its financial and operating strength.
The 2011 EPS, related to continuing operations, was negative: $(6.23) due mainly to $396 million of “transformation costs”, with the 4th quarter contributing with around $312 million.
Transformation costs are related to the separation of Exelis and Xylem: the management argues that there will be some other charges (related to the same reason) coming in the next 12 months.
I think these one-time charges and the expenses related to the acquisition and startup of new contracts are currently hiding the full potential of ITT earning power to the market.
After the spinoff, ITT began to aggressively allocating capital in order to expand its presence worldwide, as the recent acquisition of the australian Blakes Pump Engineers demonstrates. Is this the start of another period of acquisitions? Only time will say..
Finally, the company forecasts 2012 adjusted earnings per share of $1.62 to $1.72.
It seems that, at the current price of $22.88, the company is not so cheap, but, if we give a look at the balance sheet, we can see that ITT carries $7.31 of net cash. So, adjusted for net cash, and conservatively assuming the lower range of the guidance, ITT is currently selling for a (forward) P/E of 9.61.
Conclusion
The post-spinoff ITT Corp. is a company with no debt, much less pension liabilities than before, double digit growth in emerging markets and strong operating growth in all its divisions.
In addition, ITT stock is selling at a quite reasonable price.
Of course I’d like a greater margin of safety, so I would initiate a position at these prices, with the possibility to add if, for any reason, the price should plunge.
Disclosure: I do not own ITT shares, but could initiate a long position in the next week
ITT Corporation has been around for almost one century. In fact, it was founded in 1920 with the name of International Telephone & Telegraph. During the 1960s and 1970s, the company derived its growth from a long series of acquisitions, turning itself into an enormous conglomerate. In 1986 it sold the telecom assets (therefore separating its activities from its name) and in 1995 it split up into 3 separated publicly held companies (at the time of split the divisions were: insurance, industrial, and hotel/entertainment).
After the split (in the form of a double spinoff of the insurance and entertainment businesses), the company took the name of ITT Industries, Inc., which was once again changed to ITT Corporation in 2006 (actually, this was the post-spinoff name of its hotel/entertainment business, subsequently acquired by another company and delisted).
The recent (multiple) spinoffs
At the beginning of last year, the company announced its plans to separate into... guess what?... 3 independent publicly traded companies!
On October 31, 2011, ITT spun off its Defense and Information Solutions business into a company named Exelis, and its Water Technology and Services business into a company named Xylem.
As we’ll see later, what ITT retained was its “pure” industrial division, so we can think of this one as just a step further in the process that started with 1995 split. As Joel Greenblatt often remarks in his first book, a spinoff deal can often provide a profit opportunity (see my latest article on this topic), so analyzing Exelis and Xylem financial prospects could be a good start.
Anyway, I’d like to focus on ITT Corporation (the parent company), because I think there are some interesting aspects that could not be already priced in..
The parent company
The post-spinoff ITT is composed by 4 divisions:
- Industrial Process: design and manufacture of industrial pumps and valves for the oil and gas, chemical, mining and industrial market
- Motion Technologies: design and manufacture of braking technologies and shock absorbers for the automotive and rail markets
- Interconnect Solutions: design and manufacture of connectors and interconnects for the aerospace, industrial and transportation market
- Control technologies: design and manufactures of products including fuel management, actuation, and noise and energy absorption components for the aerospace and industrial markets
Let’s have a look at how the spinoff process has been carried out, especially referring to cash and debt levels.Going through ITT SEC filings, I found this 8-K report filed on November 4, 2011, confirming (among other things):
1) “the transfer, upon the Spin-off, of certain assets and liabilities by ITT to Exelis and Xylem. These assets and liabilities relate primarily to postretirement benefit plans for which Exelis and Xylem became the plans' sponsors upon completion of the Spin-off”
2) “the post-separation capital structure of ITT, including (i) the 1:2 Reverse Stock Split, (ii) the receipt of net contributions by Exelis and Xylem to ITT of $104 million and $555 million, respectively, and (iii) the retirement of $1.3 billion of indebtedness of ITT [..]”
In a few words, ITT transferred to Exelis and Xylem most of the pension liabilities, and its spinoff subsidiaries transferred (in total) $659 million to the ITT parent company.
In addition, also thanks to this transfer, ITT was able to retire $1.3 billion of debt, practically turning itself into a debt-free company and driving the company Debt/Equity ratio from 0.74x to zero (pre and post-spinoff).
Another aspect worth noting is that this is a quite unusual spinoff: ITT pure industrial business was smaller than its spinoff divisions (see the picture below).
In these cases, as Mr. Greenblatt suggests, it will be more helpful to think of the parent company as the (real) spinoff.
This is also confirmed, for example, by the fact that, on October 31, 2011 (the spinoff date), Xylem took the place of ITT Corporation in the S&P 500 index (Xylem capitalization is, as we write this article, much greater than ITT cap).
This means that most of institutional portfolios will probably add Xylem stock to their holdings rather than ITT.
Value investors love this kind of circumstances.
ITT Corp. latest financial results
On February 29, 2012, ITT released its 4th quarter and 2011 year-end financial results, showing strong improvements in all of its four divisions, in particular in the Industrial Process and Control Technologies businesses.
One of the best achievements was a 19% growth in emerging markets (especially China and Brazil).
Most of ITT businesses are cyclical, so these results don’t come completely unexpected (although ITT management plays a key role in this success), and, as the economy recovers, we could expect ITT still improving its financial and operating strength.
The 2011 EPS, related to continuing operations, was negative: $(6.23) due mainly to $396 million of “transformation costs”, with the 4th quarter contributing with around $312 million.
Transformation costs are related to the separation of Exelis and Xylem: the management argues that there will be some other charges (related to the same reason) coming in the next 12 months.
I think these one-time charges and the expenses related to the acquisition and startup of new contracts are currently hiding the full potential of ITT earning power to the market.
After the spinoff, ITT began to aggressively allocating capital in order to expand its presence worldwide, as the recent acquisition of the australian Blakes Pump Engineers demonstrates. Is this the start of another period of acquisitions? Only time will say..
Finally, the company forecasts 2012 adjusted earnings per share of $1.62 to $1.72.
It seems that, at the current price of $22.88, the company is not so cheap, but, if we give a look at the balance sheet, we can see that ITT carries $7.31 of net cash. So, adjusted for net cash, and conservatively assuming the lower range of the guidance, ITT is currently selling for a (forward) P/E of 9.61.
Conclusion
The post-spinoff ITT Corp. is a company with no debt, much less pension liabilities than before, double digit growth in emerging markets and strong operating growth in all its divisions.
In addition, ITT stock is selling at a quite reasonable price.
Of course I’d like a greater margin of safety, so I would initiate a position at these prices, with the possibility to add if, for any reason, the price should plunge.
Disclosure: I do not own ITT shares, but could initiate a long position in the next week
