Bumpy Ride After the Spinoff: Xylem Inc (XYL), ITT Corp (ITT)

Excelis’s performance has been somewhat disappointing. From its debut price of $12 per share, the company’s stock has ranged between a high of $12.86 per share and a low of $8.34 per share. As of mid-February, it sits near $11. This represents a discount of slightly more than 9 percent in actual terms and nearly 30 percent relative to the broader market’s performance.

Long-Term Outlook and Likely Outcomes

It is important to note that Excelis’s long-term share price movements are likely to be affected by looming budget cuts to various U.S. defense programs. In fact, anticipation of these cuts has been a principal cause for its relative weakness since the spin-off. Along with other defense contractors like Northrop Grumman (NOC) and Raytheon (RTN), Excelis relies on the U.S. government to fund the bulk of its activities. While the company’s survival is not yet in question, it is clear that an extended period of military budget cuts would take a substantial chunk out of its bottom line.

Meanwhile, ITT looks poised to re-position itself in the wake of the split. Since the financial crisis, the company has struggled to keep up with its more nimble competitors. With the dual spin-offs now safely in the past, ITT’s investors have already rewarded its management team with a 40 percent stock-price boost. With a decent amount of cash and no debt on its books, this company looks like a prime investment target.

Of these three companies, ITT looks like the strongest short-term bet. However, Xylem offers an interesting long-term play on the future of the global water-delivery industry. As the planet’s population increases, sources of fresh water will become scarcer and dirtier. As a purveyor of large-scale storage and filtration systems, Xylem is well-positioned to take advantage of this trend. If this thesis is correct, Xylem’s shares look very cheap at these levels. Long-term investors would do well to take note.

The article Bumpy Ride After the Spinoff originally appeared on Fool.com and is written by Mike Thiessen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.