Spinoffs are known for being a mixed bag from an investor’s viewpoint. Some of them can unlock the true value of businesses by allowing the spinoff and the parent company to focus on their niches rather than being hampered by underinvestment and undervaluation as part of a bulkier corporation. On the other hand, some spinoffs are made so that a parent company can shed dead weight, get rid of legal liabilities or satisfy regulatory requirements.
A spinoff is no guarantee of success or failure in and of itself, as a lot depends on why the spinoff was made and whether its collection of assets and operations works well together.
In the first half of 2023, there were nine spinoffs from publicly traded companies in the U.S., according to the GuruFocus Spinoff List. Out of these nine, four have outperformed the S&P 500 by double-digit percentages: GE HealthCare Technologies Inc. (GEHC, Financial), Vitesse Energy Inc. (VTS, Financial), Crane NXT Co. (CXT, Financial) and Knife River Holding Co. (KNF, Financial).
Let’s take a look at why these companies were spun off from their parent companies, what their business operations consist of and how likely they are to unlock value for shareholders.
GE HealthCare Technologies
GE HealthCare Technologies (GEHC, Financial) was spun off from its parent company, General Electric Co. (GE, Financial), on Jan. 4. Since then, the stock price has risen 33.39%, outperforming the S&P 500 by 16.88%.
GE HealthCare primarily consists of GE’s consumer health and drug discovery businesses, which it spun off as part of a years-long turnaround plan. It is also home to the medical imaging, information technology and medical diagnostics businesses. The parent company now is made up of the energy and aerospace businesses. GE plans to spin off the energy business in early 2024.
After years of struggling with growth, dragged down by a bloated conglomerate structure, GE embarked on a journey to downsize and split in three in order to bring back growth and attract higher valuations from investors. The initial success of GE HealthCare’s stock has buoyed investors’ confidence.
Vitesse Energy
Vitesse Energy (VTS, Financial) separated from its parent company, Jefferies Financial Group Inc. (JEF, Financial), on Jan. 17. The spinoff’s price is up 57.01% since that day, beating the S&P 500 by 44.60%.
As an oil and gas company, Vitesse Energy has little relevance to the main business operations of Jefferies, a diversified financial services company. According to Jefferies, this move was part of a broader effort to downsize its merchant banking portfolio. Though Jefferies did not specify as much, it is possible that the effort to reduce merchant banking exposure has to do with the increasing risks of commercial loans thanks to rising interest rates and the energy sector’s notorious cash problems.
Vitesse does appear to have a solid balance sheet with an Altman Z-Score of 3.27, which indicates the risk of bankruptcy is very low. However, its operating margin is -26.30%, and it should be just as cyclical as the rest of the energy sector, which is both good and bad depending on where oil prices are headed. The stock also boasts an attractive dividend yield, which is 4.47% as of this writing.
Crane NXT
Crane NXT (CXT, Financial) spun off from parent company Crane Co. (CR, Financial) on April 4. The stock price is up 36.21%, outperforming the S&P 500 by 27.21%.
This was the type of transaction where the main company, Crane Holdings, divided itself basically in two, renaming the parent part of the company Crane Co. and the spinoff Crane NXT Co. Crane NXT is the payment and merchandizing technology business, while Crane holds the aerospace, electronics and process flow businesses.
It is interesting to note the spinoff itself resulted in a huge drop in Crane NXT’s price right before it hit the market for the general public, and it is not surprising to see that this was mirrored by an increase in Crane’s stock price. Despite the seemingly logical business separation, this is a warning sign that not all may be as it seems.
Knife River Holding
Knife River Holding (KNF, Financial) separated from its parent company, MDU Resources Group Inc. (MDU, Financial), on June 1. Since then, Knife River’s stock price has risen 28.53%, beating the S&P 500 by 22.93%.
Knife River is a holding company for construction materials and contracting companies in the western, central and southern regions of the U.S. Its separation from MDU Resources represents a clean division of two different operations; MDU Resources now focuses on essential products and services for the regulated energy delivery and utilities markets.
Due to the nature of its businesses, it seems that Knife River will likely correlate with the broader construction industry, while MDU Resources has a higher-risk, higher-reward outlook due to its involvement in connecting energy to the grid in the midst of higher electricity connectivity needed for clean energy and necessary upgrades to the failing electric grid in the U.S.
