Are These Spinoffs Better Bets Than Their Parents?

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Spinoffs have been a big theme over the last six months as more companies try to maximize shareholder value. Some of these have outperformed their parents. Big cap companies like Pfizer, ConocoPhillips, Sears Holdings, and Abbott Labs all spun off divisions.  Zoetis (NYSE: ZTS), Phillips 66(NYSE: PSX), Sears Hometown and Outlet Stores (NASDAQ: SHOS), and AbbVie (NYSE: ABBV) have done fairly well since their IPOs.

AbbVie is up 10% in less than a month. Phillips 66 has been a monster doubling since its May IPO. Sears Hometown has run from $28.00 to $44.00 since October and Zoetis only debuted less than 10 days ago and is up over 25% from its IPO pricing at $26.

Better Bets?

The operative word here is bet because even if there are figures for a spinoff's revenues when it was under its parents' wing new numbers are hard to come by just like any IPO. Spinoffs should be treated as speculative until they have at least a few earnings releases under their belt.

What's nice about spinoffs is that some of them come with yield which doesn't happen with most IPOs. And some still have good relationships with their 'rents who are willing to slip them a few bucks if need be or help them out as they begin their new lives.

Phillips 66 has been the best performer of the bunch but it's also the oldest and trades at a 9.89 P/E with a 1.90% yield. It goes ex-dividend on February 18, if you're interested. Parent ConocoPhillips, the major integrated oil company may be the better longer term investment with a 4.50% yield and a lower P/E of 8.92 just for the yield alone.

But Phillips 66 has a PEG under 1 at .82 and it's a big boy with a $40.12 billion market cap. It's actually larger than its two main competitors Marathon and Valero. It operates 15 refineries with a capacity of over 2 million crude oil barrels a day among many other oil and gas related projects. Its earnings have been good, but analysts are only seeing 10.78% five year growth (yoy).

Then there's Sears Hometown and Outlet Stores, much the better proposition than parent Sears Holdings. The market hasn't made a big fuss over this name since they were spun off in October. Maybe they should with the Q3 2012 earnings release on November 30 that reported a 27% increase in operating income, same store sales numbers up 3%, and a rise in EPS from $0.29 earnings per diluted share to $0.38 earnings per diluted share. In the same timeframe parent Sears Holdings reported a loss...again. This time $4.70 a share.

Sears Hometown is the outlet for Sears and has 126 stores that resell Sears merchandise at discounts and parent Sears allows them to sell back merchandise that hasn't moved. Some hardware and Hometown stores are franchised. The most respected Sears brands are available at these stores including: Craftsman, Diehard, and Kenmore appliances. All in all it's a pretty sweet deal for Sears Hometown and its shareholders. Sears Hometown trades at a 17.40 P/E. It trades less than 100,000 shares a day but expect that to climb as the good news about Sears Hometown gets out.

The Big Pharma Spinoffs

AbbVie was spun off from Abbott Labs on January 1, 2013 and is now the proprietary pharmaceuticals business including the jewel of the crown, blockbuster drug Humira which contributed $1 billion in 2012 sales, and still seeing new indications come online but loses patent protection in 2017. Its second group of drugs on the market, their cholesterol drugs, are already facing sales decreases as generic competitors stepped in late last year. They have 11 drugs in phase III testing, the most promising being an interferon free Hep C combination, but none of these are likely to be rolled out until 2015.

On its January 30 earnings call it announced Q4 2012 results and said they have $7 billion in cash available and are confident that the $1.60 annualized dividend is sustainable. This breaks down to a 4.50% yield at around a 50% payout ratio and they also have $6 billion in operating cash flow. AbbVie trades at a forward P/E of 11.74.

Zoetis, the largest global animal health company, has only been around for two weeks as a separate company and so there's not much yet to tell. The company is still somewhat attached to parent Pfizer as Pfizer still holds 83% of its stock but in return allows access to its chemicals library for seven more years as Zoetis sees the need.

Zoetis is trading at a pricey 36.56 P/E and doesn't afford the yield of Pfizer at 3.60% with a much lower P/E of 13.97. But growth is expected to be higher at Zoetis going forward at 5.7%, more than double the 2.61% growth rate for Pfizer. In the US alone the pet products industry is a $53 billion business with spending rising year after year according to the American Pet Products Association and Zoetis sells to 120 countries. Zoetis brought in revenues of $4.2 billion to Pfizer in 2012.

Going Forward

Of all these Sears Hometown and Outlets may be the one with the most upside as its lightly covered and its almost a "no way to fail" business model thanks to its relationship with parent Sears Holdings. This one is definitely better than its parent. Phillips 66 continues to outperform and is as strong a company as its parent. Would-be AbbVie investors may want to do more research in the name but the yield is enticing. Zoetis with the biggest IPO since facebook should be a "wait and see" name but it is in a true growth sector, the $22 billion animal health industry.

 


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