One of the mistakes that I frequently make, and I am working to fix, is that I tend to only analyze assets as they are at the moment rather than taking into account what they will be–specifically, the invisible aspect of a corporation’s deal-making potential.
You may remember earlier this summer when I voiced disagreement with the professional analysts covering Anheuser-Busch that were projecting 9% annual growth at the giant brewmaker. I looked at the amount of costs already wrung out of the company, saw the anemic revenue growth, and figured there was no way earnings could grow at a rate of 9%.
What I didn’t factor into my analysis was this: The invisible, intangible deal-making ability of Anheuser-Busch executives to make an acquisition that would bolster earnings per share because the subsequent cost-cutting at the acquired company would be greater than any share dilution necessary to executive the deal. … Read the rest of this article!
The reason why stock split-offs are generally unpopular with investors is that it requires the measurement of figuring out how much of a company you’re familiar with (the parent company) to exchange for a company that is relatively unknown. And because stock split-offs usually occur in prosperous economies, you tend to receive a misleading set of figures–the truly long-term investors want to know how a company performs in the worst of times, and that information is not usually available at the time you have to make your decision.
But unfortunately, life isn’t so simple that you can adopt the rule that split-off companies should always be ignored. In fact, the academic studies show quite the contrary. In Dr. Jeremy Siegel’s work “Stocks for the Long Run”, he studied the performance of corporate spin-offs by comparing their performance to the original parent company for the subsequent ten years after the spinoff … Read the rest of this article!
Stock spinoffs are one of my favorite corporate events. If you are a shareholder of a company that is undergoing some kind of divestment, it is usually wise to pay attention. It is almost certain that the spun-off company has a different growth profile, earnings quality, and overall debt picture than the parent. Sometimes, a spinoff is done to pass off liability–like when Arch Coal and Peabody Energy shed assets to create Patriot Coal which was destined for immediate bankruptcy (a matter that is still being litigated to this day.)
Other times, the company spinning off the stock is the one in trouble–look at what Sears has done since 1993. In the end, Sears will go bankrupt, but in the past two decades you would have collected Allstate, Discover Financial, Morgan Stanley, Sears Canada, Lands’ End, and perhaps even a Seirs REIT before it is all said and done. That … Read the rest of this article!