(By Becca Lipman. Data sourced from Finviz.)
While diversification is generally considered a positive attribute, for some companies product diversification may be more of a hindrance. With that in mind it seems companies have been reporting more corporate “breakups” this year than the celebrity tabloids.
On a basic level, conglomerates are finding that more focused businesses often have the advantage over consolidated ones in that a downward trend or problem in one industry will not effect the value of another.
“Companies are betting investors will pay higher stock prices for more discrete businesses than they do for consolidated ones,” reports USA Today. So far “companies have announced 38 spinoffs and split-offs in the U.S. this year, the first annual uptick since 2007,” and already over the 35 announced in 2010.
Some examples of this years’ announced breakups:
The McGraw Hill Companies announced this month it will separate their education textbook publishing company from its market data companies which includes its Standard & Poor’s ratings business.
The breakup was in agreement to investor demands who felt it was unreasonable to have the different companies under one roof. Investors are pushing for more spinoffs of the McGraw Hill’s other companies, but as Pat English, chief executive of Fiduciary Management Inc. and a large holder of McGraw-Hill shares puts it: “It’s a first step.” (Via Reuters)
A Kraft Foods press release on August 4th announced “its Board of Directors intends to create two independent public companies: A high-growth global snacks business with estimated revenue (1) of approximately $32 billion and a high-margin North American grocery business with estimated revenue of approximately $16 billion.”
CEO Irene Rosenfeld said “The move will help Kraft push snack products such as Cadbury chocolates and Oreo cookies into emerging markets while the slower-growing, higher-margin grocery business — which will keep the Oscar Mayer meats and Maxwell House coffee brands — expands in the U.S. and returns cash to shareholders.” (viaBloomberg)
Sprawling conglomerate Tyco is aiming to divide and conquer as well. The industrial giant has already broken into three pieces, but the remaining core plans to break into three more.
On September 19th, “the remaining core of the company announced plans to break into its ADT home security business in North America; its valve business for water systems and other industrial uses; and its commercial fire-detection and security operations.” (via The Wall Street Journal)
Companies that should break up:
“PepsiCo Inc. shareholders stand to reap a 49 per cent gain if Chief Executive Officer Indra Nooyi splits the soft drinks business from snack foods, joining a wave of breakups from Kraft Foods Inc. to Tyco International Ltd.” reportsBloomberg.
Pepsi’s drinks have been losing market share to Coca-Cola and other soft drink manufactures. Investors are concerned the division is hindering their otherwise profitable snack food market. Separating the two could mean higher valuations for the company.
“In a breakup, PepsiCo’s snacks could be worth about $50 a share and the beverage business may be valued at $40 a share, based on a sum-of-the-parts model from Edward Jones’ Russo. At $90 a share, that’s 49 per cent higher than the company’s closing price of $60.39 yesterday.” (via Bloomberg)
Goldman Sachs: According to Rob Cox of Reuters, “based on current market metrics, Goldman’s parts are potentially worth a lot more than the whole. And many of the justifications that the firm has given in the past for maintaining its structure look out of step with the changing global regulatory framework.”
He goes to explain some potential financial benefits, but concludes it’s hard to imagine the company breaking up in the near future. After all, it belongs to an industry that is not only operating under book value across the board, but believes their parts work best in combination.
Interested in any of the companies mentioned above? We list some key financial information below. Click on the links to access more in depth financial information and to access Kapitall’s interactive charts.
analyse These Ideas (Tools Will Open In A New Window)
1. The Goldman Sachs Group, Inc. (GS): Diversified Investments Industry. Market cap of $49.50B. Price as of 9/22 at $92.44. The stock is currently stuck in a downtrend, trading -13.99% below its SMA20, -21.6% below its SMA50, and -36.2% below its SMA200. It’s been a rough couple of days for the stock, losing 6.39% over the last week.
2. Kraft Foods Inc. (KFT): Food Diversified Industry. Market cap of $60.28B. Price as of 9/22 at $33.47. Relatively low correlation to the market (beta = 0.55), which may be appealing to risk averse investors. The stock has gained 13.01% over the last year.
3. The McGraw-Hill Companies, Inc. (MHP): Publishing Books Industry. Market cap of $13.06B. Price as of 9/22 at $42.38. The stock has had a good month, gaining 17.8%.
4. Pepsico, Inc. (PEP): Soft Drinks Industry. Market cap of $96.21B. Price as of 9/22 at $60.79. Relatively low correlation to the market (beta = 0.54), which may be appealing to risk averse investors. The stock has lost 6.% over the last year.
5. Tyco International Ltd. (TYC): Diversified Machinery Industry. Market cap of $20.41B. Price as of 9/22 at $42.66. The stock has had a couple of great days, gaining 6.34% over the last week.
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
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