Not all spinoffs are sucessful

In One Up on Wall Street, Peter Lynch describes spinoffs as having great potential for being successful investments. A few of the qualities he likes about spinoffs are that they are headed by good managers and have healthy balance sheets.

Companies like to spinoff parts of their business to “unlock value.” It’s a term that gets used a lot by investments pro’s to describe a situation where the earnings potential of one part of the business isn’t fully appreciated by the market since it’s lumped in with the legacy business.

Besides the ones below, the recent spinoff by stalwart Johnson & Johnson (JNJ) that created Kenvue (KVUE) makes a good example.

Hewlett-Packard

Another good example of a spinoff would be Hewlett-Packard. In 2015 Hewlett-Packard split into two companies, Hewlett-Packard Inc (HPQ) and Hewlett-Packard Enterprise (HPE). The difference between the two being one was more focused on the consumer and the other more on enterprise business.

After 8 years, the two companies have done well. At the time of this writing the consumer-focused HP Inc (HPQ) has gained over 130% and the enterprise-focused HP Enterprise has gained over 100%.

However, not all spinoffs are guaranteed to be success stories.

Xerox and Conduent

In 2017, Conduent (CNDT) split from its parent company Xerox (XRX). As expected it had a healthy balance sheet and presumably good managers. However, something has gone wrong since the split.

The company operates as an electronic toll-road fee collector and speed enforcer across the United States. To put it mildly, the technology used in its operations has come up short in delivering its service. As a result, it has incurred a bunch of lawsuits and debt is piling up. Conduent has a great business model but the managers have bungled the operation.

Not surprisingly the share price of Conduent has cratered. Here you can see it against Xerox who likewise has performed poorly since the split.

Of course, when Lynch outlined his principles of investing he never said they were guaranteed to yield great results. That’s why it’s important to always do research before buying a stock. Personally, I still believe the business model for Conduent is great but until the management, debt and lawsuit issues are behind them I’m ok with keeping it on my watchlist. Who knows? It might make a great turnaround candidate at some point.

If you’re interested in finding some good spinoffs for your portfolio, consider our Portfolio Plus. It has a few good spinoff opportunities that fingers-crossed don’t end up like Conduent.