US Spin-Offs Beat S&P 500 (Up 34% YTD)

BNSPIN Index +38% Ytd vs S&P500 +12%

Large diversified conglomerates aim to unlock value by divesting slower-growing units that tend to hold back the stock’s overall valuation, saddling them with the ‘conglomerate discount’. Some spin-offs are forced on management as activists’ demand change, while sometimes the Spin-off announcements by competitors exert pressure on company management to initiate similar actions. By spinning off various units, a truer valuation emerges for both the parent and the spin-off. The companies have utilized spin-offs to sharpen their strategic focus, extract growth, enhance returns, attract new investors, scale operations, and increase shareholder value.

Spin-Off Research (http://spinoffresearch.com)

According to a Bloomberg article dated April 1, 2024, Despite a slight decline from 2021’s record high (234) and 2022’s near-record total (232), 2023’s deal count of 211 was the third-highest in recent years, indicating a strong and consistent trend. This trend is expected to continue in 2024, further solidifying the role of spin-offs in the market. Several prominent blue-chip companies that recently used spinoffs to unlock shareholder value include GE Aerospace (previously General Electric), Kellanova (Previously Kellogg), Johnson & Johnson, 3M (MMM), Raytheon Technologies (previously United Technologies), etc.

Due to the increase in the number of spin-offs over the years, multiple indexes and ETSs have been created. We have looked at the Bloomberg Spin-Off Index (BNSPIN)1, Invesco S&P Spin-Off ETF2 (CDS US), and the S&P US Spin-Off Index (SPUSSOUP), which tracks spin-offs. (refer link to view components) For our analysis, apart from companies from the BNSPIN and CDS US indexes, we have also included the spin-offs covered by SOA in the last 4 years. Our list consists of 55 spin-offs, and we have excluded non-US domiciled/listed stocks and carve-outs (partial IPOs). Moreover, we have also excluded Liberty Media Corporation – Liberty Live from our list, although it is a part of the Bloomberg Spin-Off Index, as the stock was formed as a tracking stock of Liberty Media Corp.

Performance Review

The recent performance of the Bloomberg Spin-Off Index (BNSPIN) has caught the attention of investors, rising an impressive 38% YTD in 2024, and has outperformed the S&P 500 index by ~26%. Moreover, the BNSPIN Index has outperformed the S&P500 by ~38% since 2020. Despite the broader market’s volatility, the spin-off strategy has shown resilience and potential for long-term value creation, as evidenced by the strong performance of the BNSPIN index. The Invesco S&P Spin-Off ETF (CSD US)3 has returned ~14.2%, outperforming the S&P 500 Index by 2.4% year to date. For investors interested in this space, the Bloomberg Spin-Off Index (BNSPIN) ‘s current performance highlights the potential benefits of incorporating spin-offs into their portfolios. These investments offer exposure to companies often well-positioned for growth and operational efficiency post-separation from their parent entities.

As multiple spin-offs have been in the last four years, we have highlighted the top 10 gainers, ranking the stocks according to gains recorded by SpinCo since separation/regular-way trading date upon spin completion. The top performers since 2020, Constellation Energy (+363.3%) and Carrier Global (+288.0%) have been the best performers. (refer link to view the Excel sheet).

Top Performers

This section will discuss a few spin-offs that have delivered exceptional results and can be considered role models for spin-offs/separations.

1 – Constellation Energy: Constellation Energy (CEG), a top performer since its spin-off in our list, was spun-off from Exelon in January 2022, containing Exelon Generation’s nuclear plants (largest US fleet of nuclear power plants) and other generating assets in a standalone, unregulated company. Constellation’s owned generating capacity is 33,100 megawatts. Within this, Constellation’s nuclear-powered electricity generation capacity is 22,100 megawatts or 67% of its total capacity. Nuclear is unique and thus preferred among electricity-generating fuels because it’s non-hydrocarbon, especially a 24/7 baseload. While enthusiasm for an independent power producer with so much carbon-free electricity production capacity, especially nuclear, CEG will likely deliver good returns in the future. Ongoing federal and state decarbonization policy goals (Net Zero Coalition targeting zero emissions by 2050) and legislation play directly to Constellation’s strength: its large fleet of nuclear generation plants, with high capacity factors, have been and will be key in providing non-hydrocarbon (clean) electricity.

2 – GE Spin-Offs: In the 2000s, GE’s expansion was spurred by GE Capital’s success, the company’s financial arm, along with the company’s diversification strategy. However, GE Capital suffered losses and was bailed out by the US Govt. in the backdrop of the 2008 financial crisis. Consequently, GE was a marked underperformer during 2011-2021 due to over-diversification, challenges in GE Capital’s business and vulnerabilities, inability to respond to changing market conditions, and high debt. GE is a classic case of a spin-off strategy generating superior returns. GE was a big conglomerate with limited synergies amongst various divisions and thereby saddled with a conglomerate discount. GE spun-off GE HealthCare (GEHC) on January 5, 2023, and GE Vernova (GEV) on April 2, 2024, leaving the original company an aerospace and aviation company named GE Aerospace (GE), which was regarded as a “crown jewel.” by Wall Street analysts. Post-spin-off of GEHC in January 2023 till April 1, 2024, GE (while consisting of Vernova business) had delivered ~150% returns, outperforming the S&P 500 by ~114%, while GEHC recorded returns of ~30% and outperformed the S&P 500 by ~12.0%. Post spin-off of Vernova on April 2, GE Aerospace (GE) has given 23% returns, while GEV was up by ~27% as of 5/24. With the breakup of GE into three independent companies and divestiture from other non-profitable businesses, GE has completed its turnaround story and looks stronger than ever, with all three independent companies operating in attractive markets. GE (on a consolidated basis) has delivered 114% returns since it announced its separation into three independent companies in November 2021. As GE Aerospace (GE) is a Parent, it is not in the Top Performers list in the table above.

3 – Carrier Global Corp: Carrier, the 2nd best performer in our list, was spun-off from United Technologies (now known as Raytheon Technologies) in April 2020 as an HVAC, refrigeration, fire and security solutions. Recently, the company sold its commercial refrigeration business to Haier and its Global Access (security) business to Honeywell in December 2023, following the announcement of the sale of its Industrial Fire business in March 2024 to Sentinel Capital Partners, which is expected to be completed in 3Q24. With this, the company is on track to become a pure-play provider of HVAC products, selling over $5 billion of its portfolio and completing its portfolio transformation. CARR is on track for margin improvement and approaching a growth rate of MSD/HSD, allowing for considerable shareholder returns with distributions. Also, the company’s organic revenue trajectory has been strong at a time when CARR is transforming its portfolio.

The following stocks from our Coverage list are likely to deliver market-leading returns

i) Crane Co: Crane Co, specializing in manufacturing and distributing industrial products, was spun off from Crane Holdings (now known as Crane NXT) in April 2023. After a year since RW trading, Crane has delivered substantial returns on the back of solid operational performance. During its investor day on May 14, Crane expects a low-double-digit core growth CAGR at A&E from 2025-2028 vs. the 7-9% long-term segment target. Crane is a key player in the aftermarket segment of the aviation industry and has a strong portfolio of products that meet the requirements of emerging trends in the aviation industry’s electrification but simultaneously create needs for its other alternative products. The company is also expected to benefit from growing electrification and demand for high-power applications and fuel-efficiency products in the long term. For the past six years, the company has launched more than 300 products in its Aerospace & Electronics (A&E) segment, and many of them are expected to have revenue cycles that can last for the next 30 years, specifically in the commercial aerospace market, making the revenue cycle predictable. Most analysts are positive on the stock giving it a Buy/overweight rating, and the stock is expected to continue its growth trajectory.

ii) GE Vernova: GE Vernova is likely to replicate the growth story of Constellation Energy and deliver good returns. The company operates in the Power, Wind and Electrification business, serving 20% of a growing $1.4 trillion market. The company has positive tailwinds on the back of Gas Power, Onshore Wind, and Grid business expected to record strong margins, with Onshore Wind having high-single-digit margins in ’24 and Grid having mid-single-digit margins. The company also talked about the massive Offshore business, whose backlog was brought down to $4 billion and is expected to show profitability post-2025. Furthermore, industry experts forecast that the world will need 55% more electricity generation in 2040 than in 2022 and that electricity levels required to reach economy-wide net zero emissions would need to more than double from the 2022 level. The large commercial, industrial and residential customers place heightened importance on decarbonizing their electricity use. Moreover, the recent Government policies serve as tailwinds for the customers and suppliers like GE Vernova. Industry experts conservatively anticipate spending in the power and end-use sectors to increase from $1.4 trillion annually in recent years to more than $2.4 trillion annually in the 2030s.

iii) Worthington Steel: Worthington Steel (WS) was spun-off from Worthington Enterprises in December 2023 and operates as a steel processor in North America. It offers carbon flat-rolled steel, tailor-welded blanks, electrical steel laminations, and aluminium tailor-welded blanks. The Company serves various end markets, including automotive, heavy truck, agriculture, construction, and energy. On March 13, 2024, Worthington Steel announced that its tailor-welded blanking joint venture, TWB Company, LLC (TWB), signed a licensing agreement with ArcelorMittal Tailored Blanks for the use of its patented ablation technology in the production of hot-formed tailored blanks. This technology expands TWB’s hot-formed tailored blanking capabilities in North America. Along with this agreement, TWB plans to install a fully automated ablation line at its Monroe, Michigan, facility. Despite some volatility since the spin-off, Worthington Steel has provided +50% returns since initiation on the back of a solid 3Q24. The company claims to perform well in tougher automotive markets, as decarbonization and energy transition could benefit it. Massive investments are due in a wide range of sectors like the grid, EV charging, and trains.

1 The Bloomberg US Spin-Off Index (BNSPIN) is a modified market-cap index that contains equities over $1 billion spun off from US companies. The index includes companies from spin-off, split-off & carved-out activities, & does not include companies offered as tracking stock or in-specie. Companies are removed after 3 years. 2 Invesco S&P Spin-Off ETF (CDS US) is an exchange-traded fund incorporated in the USA. The Fund is based on the S&P U.S. Spin-Off Index (SPUSSOUP), which holds US-listed stocks that have been spun off from larger corporations within the past four years and have a float-adjusted market cap of at least $1B. Constituents are included in the index for a maximum of 48 months and rebalanced monthly. 3 The ETF includes a diverse range of holdings from various sectors, such as industrials, materials, consumer discretionary, and information technology.

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