This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

How to Profit From Stock Spin-Offs

Here are some other stocks that could arguably benefit by unlocking value in their subsidiaries.

Big pharma or nimble biotech?

Amgen (AMGN), Biogen IDEC (BIIB) and Gilead Sciences (GILD) all have a real conundrum on their hands. They are currently profiting from a range of blockbuster drugs that generate strong sales now, but those on-the-market drugs are unlikely to grow much in the future. As a result, their P/E ratios have steadily compressed over the years. Gilead and Amgen, for example, trade for around 10 times projected 2012 profits. That's a multiple usually reserved for major drug stocks like Merck (MRK) and Pfizer (PFE) that have shown almost zero organic growth in recent years.

But these relatively younger biotechs are also sitting on an extensive pipeline of new drugs. To get credit for that pipeline, it may be wise to create a tracking stock or an outright spin-off for this developing part of the business. The parent companies, with mature drugs, could carry a decent debt load and minimal cash because they already have strong cash flow. The spin-offs could be loaded up with cash to fund drug development, a move that would also allow investors to better track the value of these pipelines.

Where's the synergy?

Johnson Controls (JCI) is a fine example of a conglomerate in need of a divorce. The company has an impressive array of products targeting the auto-parts industry. Its heavy investments in new battery technologies also hold a great deal of promise. Meanwhile, Johnson Controls is also a major player in the movement toward greater building efficiency, with leading market share in heating, cooling and refrigeration systems.

Management must focus its energies on a lot of moving parts, utilizing an army of middle managers to help monitor and develop all of the company's sales and manufacturing efforts. In a rebounding economy, Johnson Controls may remain saddled with the conglomerate discount and not see much movement in the stock. Management would be wise to mimic the value-unlocking moves that Forest Oil, Fortune Brands and others have recently made.

Risks to Consider: Shares can often languish when a spin-off is first announced. They typically post better gains after the spin-off is completed.

Action to Take: The level of spin-off activity has sharply rebounded. In the fourth quarter of 2011 alone, eight companies announced spin-off plans that were valued at least $100 million. If you see a spin-off announcement and then shares drift lower, this likely creates a solid time to step in, before the post spin-off rebound takes place.

David Sterman does not personally hold positions in any securities mentioned in this article.

StreetAuthority LLC owns shares of CSCO, GILD in one or more if its "real money" portfolios.

More From StreetAuthority:




This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $125.08 -0.57%
FB $78.28 0.93%
GOOG $524.46 -1.20%
TSLA $235.70 1.20%
YHOO $41.60 0.73%

Markets

DOW 17,841.98 -86.22 -0.48%
S&P 500 2,080.15 -9.31 -0.45%
NASDAQ 4,919.6440 -19.6830 -0.40%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs