Investors are finding that breaking up companies into smaller independent entities is an effective formula.
Spinoffs, which are often pursued in order to create shareholder value and increase returns, have produced extraordinary returns by 2024.
The Bloomberg Spinoff Index (which tracks companies that have been separated from their parent firm over the last three years) has soared 63% in this year, more than twice the S&P 500’s 24% increase.
Several companies are leading this charge. Victoria’s Secret has risen 62% in the past year. BellRing Brands has risen 37%.
Constellation Energy is the crown jewel among spinoffs. It was separated from Exelon by 2022, and its stock has soared by 95% since 2024.
Not all spin-offs are the same
Although spinoffs are generally successful, not all breakups produce stellar results.
Adam Parker, Trivariate Research’s Adam Parker, points out in a Barron’s Report that spinoffs of companies from different industries perform better. However, high-quality companies shouldn’t do a spinning.
He writes: “Something about dismantling a high-quality firm creates dis-synergies.”
Recent examples illustrate this divide. While GE Vernova spun off from General Electric has gained an astounding 154%, Kenvue separated from Johnson & Johnson has fallen by more than 20% since 2023.
Solventum, a spin-off from 3M, also declined 17% in this year. This shows that spin-offs aren’t a guarantee of success.
GE Vernova – a success story of a spinoff
GE Vernova is the renewable energy unit of General Electric that has been the subject of much discussion in 2024.
When Larry Culp became CEO of GE in 2018, there were serious doubts about the company’s future.
Culp’s decision to split GE up into three distinct businesses – GE Healthcare, GE Vernova and GE Aerospace – has proven to be a game changer.
GE Vernova was initially viewed by many as a “problem” child, but has since become a star performer. It has delivered a 154% increase in return since its spin-off.
GE Aerospace also has a strong performance, with a 62% gain this year and a 194% increase since the spin-off of GE Healthcare in early 2023.
These successes set a high standard for future spinoffs and make it easier for companies pitching such moves to investors.
Can Honeywell and FedEx emulate GE’s success
The success of spinoffs such as GE Vernova sparked a new wave of announcements by major corporations.
Companies like Honeywell, FedEx and Comcast announced plans to spin-off divisions in order to unlock value and drive business growth.
Honeywell is exploring strategic options for its aerospace division under pressure from activist investors Elliott Investment Management. This has excited Wall Street.
Amit Mehrotra of UBS writes, “We believe there is an upside simply on the sum of parts basis…but most importantly, a simplified model should allow better focus, future growth, and higher valuation.” The analyst has a Buy recommendation and a price target of $298 on the stock. This is up 31% over Thursday’s closing price of $226.88.
FedEx also announced plans to spin-off its freight business in order to unlock the value of this division. The news pushed the stock over 10% higher in after-hours trade.
FedEx is trading at 12.9 times its 12-month earnings forward, a valuation that is significantly lower than other freight-focused companies such as Old Dominion Freight Line or Saia which command valuations of over 30 times earnings.
Ariel Rosa, Citigroup, has expressed concerns about the plan.
Rosa noted in a note released before the announcement that FedEx’s Freight business had lagged behind its peers, which could have limited its valuation.
FedEx has also previously highlighted the synergy that exists between its express and freight divisions, especially in terms of cross-selling.
Splitting them could be a challenge, as it would be difficult to achieve a clear separation and customers may turn to competitors.
Rosa expressed concern about potential downside risks that could emerge in early 2025, despite maintaining a “buy’ rating on the stock because of its low valuation and many other positive factors.
“While there’s logic in spinning a business to unlock value we see significant execution risks and remain unconvinced a spin would be in the best interests of long-term investors,” he wrote.
This post Honeywell, FedEx spin-off plans: Can investors hope for a GE Vernova like success? The ICD first published this post.
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