Goldman sees robust year for spinoffs. How to spot those that will outperform
Goldman Sachs forecasts another busy year for spin-offs as management teams seek to increase earnings and shareholder value in a difficult economic environment. That’s good news for investors who know what to look for in the new businesses that this activity will create. Spinoff stocks have tended to outperform their parent companies, according to David Kostin, Goldman’s chief US equity strategist, who studied the performance of these types of transactions from 1999 through 2020. However, not every spin-off knocks it out of the park. Because of this, Kostin’s work identified three attributes that tend to signal an increased likelihood of success. Compared to its parent company, the spin-off company must have lower expected stock earnings, a lower expected earnings growth rate per share, or lower expected margins, his research says. If it had a combination of those factors, even better. In a research note published last week, Kostin updated this study to look at the track record of recent spinoffs that have completed in the past two years. “Since 1999, the median SpinCo that met all three criteria above outperformed its parent by 18 [percentage points] (65% hit rate of outperformance) in the 12 months post spin-off,” Kostin wrote. “However, while 11 of the 20 spin-offs completed in 2022 have outperformed the S&P 500 since the transaction closed, only six of the spin-offs outperformed their parent company.” — the second-highest total on record — though the value of those deals was lower than in 2021, Goldman said. There were 20 spin-offs that closed last year with a combined market value of $61 billion. A further 24 transactions have been announced and are pending. GEHC YTD Berg GE Healthcare stock has been on an uptrend since the beginning of the year. The largest completed transaction of 2022 was General Electric’s spin-off from GE HealthCare, a $26 billion company. GE continues to plan to spin off its energy and aviation businesses as part of a broader multi-year restructuring of its operations that was completed Dec. 15, though public trading didn’t begin until Jan. 4. At the time of Kostin’s updated review, the healthcare business was underperforming GE stock. However, GE HealthCare shares are trending higher. The stock is up more than 24% year-to-date. The next largest deal closed over the past year was Intel’s spin-off of Mobileye, which closed on October 26, 2022. Like the GE HealthCare deal, the Mobileye transaction met one of the characteristics Kostin identified. So far, the manufacturer of advanced driver assistance systems has outperformed its parent company. Below is a list of the six companies that were outperforming their parents at the time of the report’s publication last week. With many of last year’s spinoffs trading for less than a year, it’s also helpful to look at 2021’s performance. In 2021, the value of completed spin-offs reached $112 billion and included Dell’s spin-off of VMWare, the largest deal at $57 billion. The spinoff stocks outperformed their previous parents by 3 percentage points with a 53% outperformance hit ratio, Kostin said. According to Goldman’s research, International Paper’s spin-off, Sylvamo, was the best of the bunch. Sylvamo has detracted from its parent company’s stock performance by 61 percentage points. Look for Lower Multiples For the companies that have dissolved since 2021, the best metric to determine outperformance has been identifying spinoff companies that have lower forward P/E relative to the company’s parent, the report said . “The median of SpinCo with this attribute has outperformed by a multiple (15 pp) and with a higher outperformance hit rate (83%) compared to history and the other two attributes,” Kostin wrote. Meanwhile, lower-margin companies relative to their parent have underperformed the historical trend, he said, citing recent market sentiment for the new pattern. Still, given the pipeline of deals that have yet to close and others that are likely to be announced, he sees plenty of potential opportunities. “SpinCos with higher expected EPS growth and wider margins, trading at a valuation discount, probably represent a more attractive investment opportunity than owning a minimal growth index trading at an expensive valuation,” he said. – CNBC’s Michael Bloom contributed to this report.
