There’s been a glut of stock spin-offs recently. Here are three you should consider.
Investing in stock spin-offs is one of the few ways that investors – pros and individual investors alike – can beat the market.
Spin-offs won’t outperform every year, but over the long term they tend to do quite well.
Credit Suisse found that U.S. stock spin-offs outperformed the market by 13.4% in the first 12 months of trading.
Not surprisingly, many “superinvestors” invest in spin-offs regularly. See what investing legends Joel Greenblatt, Seth Klarman, and Charlie Munger have said about spin-offs below.
Today, there are three spin-offs that you should consider buying.
Stock Spin-Off #1: ChampionX Corp
ChampionX (CHX) was formed when its parent Ecolab (ECL) decided to spin off its oil and gas chemical business and merge it will another oil and gas company called Apergy.
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ChampionX operates in the energy services industry, which was crushed during the pandemic.
Oil prices have completely recovered yet energy stocks remain well below pre-pandemic levels.
ChampionX is focused on providing equipment and chemicals to oil and gas drillers. A key advantage for the company is that 84% of revenue comes from production of wells that have already been drilled and completed. As such, the company is not as dependent on new wells being drilled.
From a valuation perspective, ChampionX is cheap, trading at ~11.6x trailing free cash flow.
The company will stay cash flow positive even in a challenging period like today and should trade multiples higher as energy markets recover.
Stock Spin-Off #2: Concentrix
Concentrix (CNXC) is a recent spin-off from SYNNEX (SNX).
Concentrix is a leading provider of technology-infused Customer Experience (CX) solutions, centered on helping its clients enhance the brand experience for their end-customers. Their solutions facilitate communication between clients, provide analytics and process optimization, and support client-centric operations and back-office processing across the enterprise.
The biggest part of Concentrix’s business is operating call centers. Companies outsource their call center needs to Concentrix, which is an industry leader and has tremendous experience.
Concentrix has delivered strong revenue and earnings growth, as shown below.
Yet the stock is cheap, trading at 14.0x free cash flow and 9.2x EBITDA. If the stock were to trade in line with its closest competitor, Teleperformance (TLPFY), which trades at 19.7x EBITDA, it would be worth 200, almost 100% upside from current levels.
Further, we could see even more upside if Concentrix is able to execute an attractive acquisition.
In 2013, it acquired IBM’s business process outsourcing unit for $505MM and with synergies, it added $120MM of EBITDA. Thus, the acquisition price was 4.2x EBITDA (including synergies).
In 2018, it acquired Convergys for 8.5x EBITDA but was able to achieve $150MM of synergies, which lowered the effective purchase price to 5.8x EBITDA.
If Concentrix is able to execute another accretive acquisition, it would create considerable value for shareholders.
Stock Spin-Off #3: Viatris Inc.
On November 16, 2020, Pfizer (PFE) successfully spun off its generic business and merged it with Mylan, to create Viatris (VTRS). Viatris is expected to have pro forma 2020 revenue of $19BN to $20BN, EBITDA of $7.5BN to $8.0BN and free cash flow of >$4.0BN.
On a pro forma basis, the new company is trading at 6.7x free cash flow and 6.0x EBITDA. It’s cheap because Viatris has high leverage and it (along with other generic manufacturers) is under investigation for price fixing. Nonetheless, potential liabilities are manageable, and the stock looks attractive.
To help matters, it will declare a ~3.7% (at its current price) dividend in Q2 2021. The company will also hold an analyst meeting on March 1 to review its outlook. This meeting could serve as a key catalyst for the stock.
*This post has been updated from an original version, published in 2020.