Phillips 66 (PSX), Fortune Brands Home & Security Inc (FBHS), Howard Hughes Corp (HHC): Performance in Three Recent Spinoffs Offers Insight Into Future Spinoff Successes

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The global equity markets see hundreds of spin-offs in a given year, and many investors make a good living off of the arbitrage and growth opportunities inherent in some of these situations. Although some spin-offs are ill-advised or actively designed to saddle spun-off companies with high levels of debt, others offer tremendous opportunities for their employees, investors and customers. Three recent spin-offs of U.S. companies fall into the latter category: Phillips 66 (NYSE:PSX)Fortune Brands Home & Security Inc (NYSE:FBHS) and Howard Hughes Corp (NYSE:HHC).

Phillips 66 (PSX)

These firms split from well-capitalized parent companies and have strong, diversified asset portfolios. In addition, they appear to be fairly well-run. However, it is difficult to paint them with the same brush. Investors who might be interested in these spin-offs or their former parents should start by comparing the companies against one another and delving deeper into the specifics of their spin-off transactions.

Although these companies operate in very different industries, their financial statements are instructive. For starters, each of these firms enjoys a solid operating margin. Like many of its oil industry peers, Phillips 66 (NYSE:PSX) has an understandably modest operating buffer of about 3.4 percent. Hughes Corporation has an operating margin of just under 20 percent. For its part, Fortune Brands Home & Security Inc (NYSE:FBHS)‘s margin hovers around the 6 percent mark.

In 2012, Howard Hughes Corp (NYSE:HHC) did suffer a substantial after-tax loss of about $39 million on revenues of $391 million. However, this was likely due to a one-off charge that should not affect its fortunes in the future. The company did post an encouraging quarterly revenue growth figure of more than 12 percent. For comparison, Phillips 66 earned $4.9 billion on 2012 revenues of $161.7 billion to produce a final profit margin of about 3 percent. Fortune Brands Home & Security Inc (NYSE:FBHS) earned $143.5 million on revenues of about $3.7 billion for a profit margin of 3.9 percent.

All three of these firms have acceptable balance sheets. With debts of $703.5 million and cash reserves of $200.5 million, Howard Hughes Corp (NYSE:HHC) has the widest debt-to-cash ratio. Fortunately, its operating cash flow figure of over $170 million seems adequate to replenish its reserves. Unlike many of its downstream peers, Phillips 66 (NYSE:PSX) has a solid cash hoard of $4.8 billion and debts of about $7 billion. Its cash flow of nearly $7 billion is more than adequate to sustain this balance sheet. Meanwhile, Fortune has a cash flow of about $254 million to offset a debt load of $326.4 million and an existing cash reserve of $259 million.

The Phillips 66 Situation

Phillips 66 (NYSE:PSX) split from ConocoPhillips (NYSE:COP) in early April of 2012. Since then, its stock price has roughly doubled in value and exceeded the overall market’s rise by a substantial margin. Whereas its former parent operates primarily as a drilling and exploration firm with a global reach, Phillips 66 (NYSE:PSX) acts as a downstream refiner and retailer that specializes in bringing crude oil and natural gas products to market. In addition to its refining and chemical production operations, it maintains a vast footprint of gas stations and convenience stores in North America. In fact, the clear operational gulf between Phillips 66 (NYSE:PSX) and ConocoPhillips (NYSE:COP) was a principal catalyst for the spin-off and ensured that the split occurred neatly and efficiently.

Fortune Brands Home & Security’s Spin-off

In late 2011, Fortune Brands Home & Security Inc (NYSE:FBHS) spun off its home goods division and re-branded itself around its core distilled spirits business. Known as Beam Global (BEAM), the new firm focuses exclusively on marketing and distributing well-known spirit brands like Maker’s Mark, Jim Beam, Canadian Club and others. Fortune Brands Home & Security Inc (NYSE:FBHS) continued on as a home goods and security company that sells security products like padlocks and bike locks as well as recognizable appliances under trade names like Moen, Martha Stewart Living and Kitchen Craft. The company has clearly benefited from a recovering economy: As homeowners finally tackle long-delayed home improvement projects, the company’s core lineup of fixtures and appliances has seen brisk sales. Since the spin-off, Fortune Brands Home & Security Inc (NYSE:FBHS) has delivered a lifetime return of over 230 percent.

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