It has been around 5 years since the 2013 spin-offs have become stand-alone public companies. This is a long enough time frame to begin to analyze the performance data and find some insights.
While spin-offs have historically been an attractive area for investors, the overall performance for 2013 spin-offs was poor. The hit rate was lower than usual with eight out of the fourteen (~57%) spin-offs tracked underperforming the S&P 500. This dragged the average return down well below levels generated by the broad indices.
It is especially important for investors to study the companies in years like 2013 so they can find ways to improve their investment process.
For 2013, we were able to find and track 14 individual spin-offs. They included companies in a variety of different industries and across the market capitalization spectrum.
Simply put, overall performance wasn’t good. The average cumulative return for the 2013 spin-offs was only ~30% and the median return was only ~12%. The range was wide with the top performing company appreciating by nearly 200% and the worst performing company declining by over 90%.
With such a small sample size of only 14 companies, the data is not statistically significant in any way. After all, the overall summary statistics can be materially impacted by the performance of just one addition or subtraction. However, it is still worthwhile to look through the companies from this year because it provides some important lessons.
As you can see in the chart below, the majority of 2013 spin-offs underperformed the S&P 500 (green bar) as measured by the S&P 500 ETF (SPY) return from 7/1/2013.
Based on the historical spin-off performance data, it is typical for the median spin-off to underperform and the hit rate to be sub-50%. However, what makes 2013 a particularly poor returning year, at least so far, is that there were few significant positive outliers (winners), but substantial losers. The S&P 500 has increased at a compound annual growth rate (CAGR) of ~10.5% since the middle of 2013, but there were only 6 spin-offs that compounded at a higher annual rate and only 2 that compounded at over 15%.
On the other hand, half of the companies compounded at a negative rate of return since they were spun-off in 2013 and 8 compounded at a rate lower than the S&P 500.
You can see a summary of this information in the histogram below.
While spin-offs can have many characteristics that make them compelling, such as crown jewel businesses that are misunderstood, they can also be burdened with liabilities from the parent company and be put in a difficult position to succeed.
With that out of the way, let’s take a look at the top performing spin-offs from 2013.
#4 Allegion PLC (ALLE)
Allegion is a global provider of access control security products and solutions (locks, latches, deadbolts, monitoring controls, etc) for residential and nonresidential buildings. They were spun-off from Ingersoll-Rand in 2013 after Trian Partners obtained a board seat.
Since the spin-off, the share price has increased around 90% (~14% CAGR) as the business has performed well. Revenues have grown at a ~4% CAGR (2013 -2017) and operating income has increased at a ~11% CAGR.
Also, it looks like the business has received much more attention since the spin-off. The international segment margins have flipped from negative to positive which is a big reason why operating income has outgrown revenue.
#3 Science Applications International Corp (SAIC)
Science Applications International (SAIC) is a government contractor providing technical, engineering, and enterprise IT services. They have large contracts with the U.S. military, NASA, and other government organizations. They were spun-off from SAIC, Inc which subsequently renamed itself Leidos.
Since the spin-off, the shares have roughly doubled and compounded at an annual rate of over 14%. They have consistently grown the business through winning new contracts and deployed over $500 million into stock buybacks.
More recently, they announced the acquisition of Engility, a government contractor, for ~$2.5 billion. It is an all-stock transaction and SAIC believes there is a large opportunity to optimize the cost structure and generate significant free cash flow. Time will tell if this is an attractive use of resources.
#2 Murphy USA (MUSA)
Murphy USA is one of the largest owner-operators of gas-station chains in the U.S. with nearly 1,450 retail stores. Roughly 80% of their stores are branded Murphy USA with the remainder being standalone Murphy Express locations. Their retail stores are located in 26 states across the Southeast, Southwest, and Midwest. Nearly all their stores are near Walmarts and participate in a cents-off per gallon discount program with the major chain.
They were spun-off from Murphy Oil, an oil and gas exploration and production company, in September 2013.
The share price has more than doubled since the spin-off and compounded at a ~16% annual rate. They have grown the number of stores by ~20% since 2013 and have been working to improve the store margins and optimize corporate costs.
Murphy USA runs a different model than some of the other publicly traded gas stations. They have a smaller store format which helps keep operating costs low and sell significantly more fuel per store than their competitors due to their advantaged locations in higher traffic areas.
There has been substantial interest in the industry over the last few years by strategics as well as financial buyers.
- Couche-Tard acquired CST Brands and The Pantry
- Berkshire took a stake in Pilot Flying J
- Susser Holdings, the owner of Stripes branded convenience stores, has been bought and sold in recent years
#1 Zoetis Inc (ZTS)
Zoetis develops and manufactures medicines and vaccines for the animal health market. They were carved out of Pfizer in February 2013.
The shares have increased at a compound annual growth rate of over 20%, or nearly 200% cumulatively since the carve-out. The shares have been driven by continually improving business fundamentals.
Since the separation, they have eliminated lower margin SKUs, improved their sales model, reduced corporate G&A, optimized R&D, and improved their supply chain. This resulted in operating margins increasing from ~20% to the mid-30% range.
Also, organic growth has been strong which has further provided a tailwind to earnings and free cash flow growth. A similar situation could potentially be developing with Eli Lilly recently carving out their animal health business, Elanco Animal Health (subscriber research report).
#3 Era Group (ERA)
Era Group is a helicopter transport operator. They are primarily used by the large oil and gas E&P companies to transport personnel to, from, and between offshore oil and gas production platforms and drilling rigs, mainly in the Gulf of Mexico and international locations. They were spun-off from SEACOR Holdings in January 2013.
The shares are down by about 45% since the spin-off. The business has been negatively impacted by the sell-off in oil prices. Their main driver, offshore oil production activity, has been especially challenged as companies are much more willing to invest in the onshore shale fields at the expense of offshore.
Furthermore, Era has a very levered balance sheet. They spun-off with a leverage ratio of ~4.8x and a high yield rating on their ~$275 million debt load. They continue to carry this significant debt burden in 2018.
#2 Ashford Hospitality Prime (rebranded to Braemar Hotels & Resorts – BHR)
Braemar Hotels & Resorts is an externally advised real estate investment trust (REIT). They invest primarily in luxury hotels in the United States and the U.S. Virgin Islands. They spun-off from Ashford Trust in November 2013.
The shares are down roughly 50% since the spin-off. The company is part of the ‘Ashford complex’ of companies which include Ashford Inc, the management company, and Ashford Hospitality Trust, another REIT. For the most part, these companies are managed and controlled by the Bennett family.
#1 FTD Companies Inc (FTD)
FTD Companies is a floral and gifting company that operates primarily in the United States. They spun-off from United Online in November 2013.
The shares are down by over 90% since the spin-off as revenues have fallen and profits turned negative. The current difficulties are in large part attributable to a major acquisition done in 2014.
In 2014, they acquired Provide Commerce, a floral and gifting business, from Liberty Interactive for $145 million in cash. In addition to the cash consideration, they issued 10.2 million shares to Liberty Interactive.
The Provide Commerce acquisition has not performed well. Revenues have shrunk by 9% from 2015 -2017 and segment operating income has decreased by more than 30%. The legacy FTD has not done particularly well either. Overall FTD consolidated revenues have declined by over 11% from 2015 -2017 and operating income has shrunk by more than 30%.
The business continues to carry significant financial leverage which puts the entire company at risk.
The overall performance for 2013 spin-offs was poor. Eight out of the fourteen (~57%) spin-offs tracked underperformed the S&P 500. The common themes throughout the worst performers were financial leverage, cyclical end markets, and poor capital allocation decisions.
While there weren’t many spin-offs from 2013 that compounded at attractive rates, there was a handful. In each case, they were fundamentally good businesses in stable industries which were separated from a much larger company. Furthermore, the best performers had opportunities for organic growth and operational improvements.
This study highlights the importance of understanding the business model and associated economics along with the capital structure and incentives of the key decision makers post-transaction.
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