Interesting Spinoffs From Sweden

GuruFocus.com
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- By Tuomo Saarnio

Spinoff stocks can be an interesting hunting ground for value investors. Several studies have found its is possible to beat the market by investing in these stocks.

How have spinoff companies performed?

Studies have found both spinoffs and parent companies outperform the market. A study by Patrick Cusatis, James Miles and J. Randall Woolridge, which was published in a 1993 issue of The Journal of Financial Economics, determined both spinoffs and parents surpassed the S&P 500 Index by an average of 30% and 18%, respectively, for the first three years after separating the business.


In a 2005 study, Lehman Brothers Chief Equity Strategist Chip Dickson discovered that between 2000 and 2005, spinoffs beat the market by an average of 45% during their first two years, while parent companies beat it by an average of 40% during the same period.

A 1993 Pennsylvania State University study, "Restructuring Through Spinoffs," covering the period from 1963 to 1988, found the stocks of spinoff companies outperformed the S&P 500 Index by about 10% per year in their first three years of independence. Parent companies also outperformed their industry by more than 6% annually during the same three-year period.

A July 1999 study conducted by JPMorgan examined spinoffs from 1985 to 1995. The study found the spinoffs generated estimated excess returns of 20% and parents returned 5% over the first 18 months.

If these findings hold true, market-beating results could be achieved by buying a portfolio of recently spun off stocks. But you can achieve even better results if you are willing to do a little reseach to find the most favorable spinoff opportunities.

How to find the right spinoff stocks

What should you look for when discovering the best spinoff opportunities? Of course, fundamentals and valuation are important, but common sense, logic and experience are also necessary. A few things to consider:

  1. Nobody knows a company's situation better than insiders. If insiders continue to hold their positions or add to them, it is the best possible sign. In spinoff situations, you should be in the same boat as insiders, so keep an eye on them to see what they do.

  2. Big institutions are selling the new company. Oftentimes, a newly divested company is too small or in a different business and, therefore, inappropriate for big institutional portfolio managers or pension funds. This can lead to large selloffs.

  3. After a spinoff, you can u ncover hidden value in the new company. Determine if one of the two companies, the parent or the spinoff, is being more greatly valued than before.



Generally, the best thing to own is the parent company before the spinoff. But you do not have to guess which companies will divest part of their business in the future - it is not a solid investing method. According to the studies, within the first three years is the best time to own spinoff companies, so you should have plenty of time analyze the situation.

Svenska Cellulosa and Essity

Svenska Cellulosa AB (SCA-A.ST) is a leading paper products company in Sweden. It is really a Nordic blue-chip stock. After spinning off its hygiene business, Essity AB (ESSITY-A.ST), in June, Svenska can now concentrate on its forest products business. In 2016, the hygiene products business accounted for 86% of overall sales, while the forest products business accounted for only 14%.

Svenska is Europe's largest private forest owner. Paper is the biggest sector followed by forest and wood. Pulp is the smallest sector. The forest sector has the best margins and generates the largest profits. The forest industry is a mature business and is not expected to have a lot of growht, except in Asia. On the other hand, the company's competitive position is strong and it is a generous dividend payer.

At first glance, Essity looks more interesting. The hygiene business has been growing and was the more profitable business before the spinoff. Margins and returns on capital have also been higher.

Bergman & Beving and Momentum Group

Bergman & Beving AB (BERG-B.ST) spun off Momentum Group AB (MMGR-B.ST) in June to increase earnings growth and focus on the development of leading brands and attractive market channels in profitable niches.

Bergman & Beving also changed its name from B&B Tools in June. Its main focus will remain on organic volume growth in existing markets, a strong balance sheet and low debt, making it possible to carry out a number of interesting corporate acquisitions.

The acquisitions of Arbesko, a leading brand of safety and work footwear, and UVECO are well suited to the company's other business. Acquisitions always involve risk, but the company has a pretty good track record. Cost reduction through increased efficiency and a reduction in funds tied up in working capital are other short-term goals.

Bergman & Beving does not offer high returns on invested capital or high margins. On the other hand, the stock price has fallen so low that even the smallest positive profit news may raise the stock price considerably. Insider buying is also a good sign.

Momentum Group operates in two business areas - tools and consumables and components and services. As part of the restructuring, Momentum Group acquired 12 operating companies, directly and indirectly, from Bergman & Beving in 2016 and 2017. These internal acquisitions were primarily financed through a shareholders' contribution.

Growth in the construction sector is favorable for the company in Sweden, Finland and Norway.

Another important acquisition was 70% of the shares of TriffiQ, one of Stockholm's largest resellers of workwear, protective footwear and custom workwear. The acquisition is well in line with the company's strategy for future growth and development.

These companies also have to classes of shares. The A series carries more voting power than the B series. This is a very common practice in Sweden, although not all investors like it.

Things happen in threes: Autoliv plans spinoff of fast-growing electronics business

You may not have to wait long for another Swedish spinoff. Autoliv Inc. (ALV), a worldwide leader in automotive safety systems, is considering separating its passive safety and electronics segments. Passive safety is a great cash flow generator and is going to be a relatively stable business. Electronics is completely different as it is a growth business. Electronics needs heavy investments unlike more mature and stable businesses. Passive safety requires the highest standards in quality and manufacturing efficiency. It will be very interesting spinoff if the company goes through with it, but the process may take about a year. Follow the developments and do your own homework.

Disclosure: Long SCA, Essity, Bergman & Beving and Momentum Group.

This article first appeared on GuruFocus.


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