Goldman sees robust year for spinoffs. How to spot those that will outperform - CNBC

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Goldman Sachs is predicting another busy year ahead for corporate spinoffs as management teams look to boost profits and shareholder value in a tough economic environment. That's good news for investors who know what to look for in the new companies that will be created by this activity. Spinoff stocks have tended to outperform their parent companies, according to David Kostin, Goldman's chief U.S. equity strategist, who has studied the performance of these types of transactions from 1999 to 2020 . However, not every spinoff knocks it out of the park. That's why Kostin's work identified three attributes that have tended to signal an increased likelihood of success. Relative to its parent, the spun-off business needs to have lower forward price-earnings, a lower expected per-share earnings growth rate or lower expected margins, his research found. If it had a combination of these factors, even better. In a research note published last week, Kostin updated that study to look at the track records of more recent spinoffs, completed over the past two years. "Since 1999, the median SpinCo meeting all three of the above criteria outperformed its Parent by 18 [percentage points] (65% hit rate of outperformance) during the 12 months following the spinoff," Kostin wrote. "However, while 11 of the 20 spinoffs completed during 2022 outperformed the S & P 500 since transaction completion, only six of the spinoffs outperformed their parent entities." A deal-filled year In 2022, the number of spinoffs rose 33% from the prior year — the second highest total on record — even though the value of those deals was lower than in 2021, Goldman said. There were 20 spinoffs that were completed last year, totaling $61 billion in market value. Another 24 transactions have been announced, and are still pending. GEHC YTD mountain GE Healthcare's stock has been trending upward since the start of the year. The largest completed deal in 2022 was General Electric' s spin off of GE HealthCare , a $26 billion business. GE still plans to spin off its energy and aviation businesses as part of a broader multiyear restructuring of its operations. On a when-issued basis, GE HealthCare's deal was complete on Dec. 15, though it didn't begin trading publicly until Jan. 4. At the time of Kostin's updated review, the health-care business was underperforming GE stock. However, GE HealthCare shares have been trending upward. The stock has gained more than 24% since the start of the year. The next largest completed deal last year was Intel's spinoff of Mobileye , which wrapped up on Oct. 26, 2022 . Like the GE HealthCare deal, the Mobileye transaction met one of the attributes that Kostin has identified. So far, the maker of advanced driver-assistance systems is outperforming its parent. Below is a list of the six companies that have outpaced their parents' performance, as of the report's publication last week. Since many of last year's spinoffs have been trading for less than a year, it's also helpful to look at 2021's performance. In 2021, the value of the completed spinoffs hit $112 billion, and included Dell's spinoff of VMWare , the largest deal at $57 billion. The spinoff stocks outpaced their former parents by 3 percentage points with an outperformance hit rate of 53%, Kostin said. The best of the bunch was International Paper's spinoff of Sylvamo , according to Goldman's research. Sylvamo crushed its parent's stock performance by 61 percentage points. Look for lower multiples For those companies that have broken up since 2021, the best metric to determine outperformance has been identifying spinoff companies that have a lower forward P/E multiple relative to the company's parent, the report said. "The median SpinCo with this attribute outperformed by a greater magnitude (15 pp) and with a higher hit rate of outperformance (83%) compared with history and the other two attributes," Kostin wrote. Meanwhile, companies with lower margins relative to their parent underperformed the historical trend, he said, citing recent market sentiment for the new pattern. Still, he sees a lot of potential opportunity ahead, given the pipeline of deals that have yet to be completed and others that are likely to be announced. "SpinCos with greater expected EPS growth and wider margins that trade at a valuation discount likely represent a more attractive investment opportunity compared with owning an index with minimal growth that trades at an expensive valuation," he said. —CNBC's Michael Bloom contributed to this report.

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Goldman sees robust year for spinoffs. How to spot those that will outperform - CNBC
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Goldman sees robust year for spinoffs. How to spot those that will outperform - CNBC

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