3 Publicly Traded Companies That Are Ripe for a Spinoff
Announcements of company spinoffs boost the value of stock prices in the near term. Yet over the long term, the value of the spinoff’s shares must deliver growth on the top and bottom line for the good times to continue.
In Western Digital’s (NASDAQ:WDC) situation, activist investor Elliott Management pressured the company to split the business into two parts of Disk Drive and Flash Memory. The company tried to sell its flash-memory business to a Japanese company. But the deal fell through, so spinning off is the next best option.
It seems the best time to split a company into two or more parts is when those businesses are performing, not when they’re struggling. Let’s examine three businesses that currently are doing well that could master a split and then profit from the move.
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Berkshire Hathaway (BRK-B)
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Berkshire Hathaway (NYSE:BRK-B) reported Q3 2023 results on Nov. 4. They included a 40.6% increase in operating profits to $10.8 billion and a $157 billion cash hoard.
A big part of the improvement in its operating earnings was from its Geico Insurance business. It generated an underwriting profit of $1.05 billion, 233% higher than its loss a year ago.
Although Berkshire’s growth in operating earnings should be the story of the quarter, most people are focused on the $157 billion in cash. Warren Buffett invests that cash into short-term Treasuries. Then the company turns them over every 3-6 months, earning nearly 5% interest. That alone would generate almost $8 billion annually for the company.
The only bad news was $23.5 billion in losses from its investments, which included a 12% decline in the value of Apple (NASDAQ:AAPL) during the quarter. Apple accounts for 47% of its $345 billion equity portfolio.
Comcast (CMCSA)
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Comcast (NASDAQ:CMCSA) CEO Brian Roberts discussed the early years working for his dad’s business on an episode of the David Rubenstein Show. More than six years old, Roberts has been busy growing the company since then.
The episode talks a lot about its cable business. We all know that’s not where the real growth is. Investors thought it was direct-to-consumer (DTC) streaming. But as Walt Disney (NYSE:DIS) showed, it’s not easy to make money from DTC.
A quick look at its 2022 annual report gives me a general idea.
Its Cable Communications segment accounted for 52% of its revenue and 76% of its adjusted EBITDA in 2022. It is the engine that drives the bus.
However, that leaves 48% of $121.4 billion in annual revenue from its NBCUniversal business, Sky in the UK and Comcast Spectacor. The latter owns the Philadelphia Flyers and Wells Fargo Center in Philadelphia.
There aren’t many publicly traded sports teams in North America.
Why not spinoff NBC Universal and Sky into an independent business? Call it Spinco A. Then, in a second move, spinoff NBC Sports and Comcast Spectacor into a third independent public company, Spinco B.
Comcast would control Spinco A, which in turn would control Spinco B.
The former would improve its adjusted EBITDA margin. The latter would move to add other sports teams to its portfolio.
Investors would appreciate separating the businesses into three distinct opportunities, each with a specific risk profile.
NextEra Energy (NEE)
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NextEra Energy (NYSE:NEE) is America’s largest utility. It also owns NextEra Resources, the world’s largest generator of renewable energy from wind, solar, and battery storage.
NextEra’s stock is down nearly 30% in 2023 and 24% over the past year. This is primarily because of its clean energy business. Higher interest rates have made large renewable energy projects more expensive.
However, interest rates aren’t likely to stay this high for more than 12-24 months. Ultimately, they’ll fall, and clean energy stocks will ride the next wave of investor enthusiasm.
At the end of 2020, Brookfield Renewable Partner LP (NYSE:BEP) had a price-to-sales ratio of 4.2. It’s currently down to 1.3. So, counterintuitively, now is the time to spin off NextEra Resources.
In 2022, NEER’s 53.8% investment in NextEra Energy Partners (NYSE:NEP) and its rate-regulated transmission business had $3.72 billion in revenue. At the same 2020 multiple as Brookfield, on a P/S basis, it would have a $16.6 billion market capitalization. Now, it’s not going to get that in the current environment, but it will in 24 months.
You go now because that ensures Florida Power and Light’s valuation is affected by the two businesses operating under one roof. Another possibility is to merge NEER with Brookfield to form an even larger global renewables business.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
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