Oil States International, Inc. (NYSE:OIS) rose over 15% on April 30th following the news that activist investor Barry Rosenstein’s JANA Partners owns 5 million shares of the stock (or 9.1% of the total shares outstanding) and will push to split up the now $4.9 billion market cap oil and gas equipment and services company. We track JANA’s quarterly 13F filings alongside those of other hedge funds as part of our work developing investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can see that the fund did not own any shares of Oil States International, Inc. (NYSE:OIS) at the beginning of this year (see which stocks JANA owned).
A breakup of Oil States International, Inc. (NYSE:OIS) has some potential to increase shareholder value. For example, one of the company’s business units provides temporary housing to workers in extraction industries (including mining and oil and gas) and could be eligible to convert to a real estate investment trust (which would then enable it to receive preferential tax treatment as long as it distributed sufficient cash to shareholders). In addition, management of the new companies is often able to better manage operations without having to concern themselves with the needs of the larger organization (read more about spinouts). It’s also possible that at least one of the smaller business units would be acquired by a strategic at a premium valuation.
Currently, Oil States International, Inc. (NYSE:OIS) trades at 12 times its trailing earnings. While Wall Street analysts have been optimistic in their outlook, with forecasts for the next several years implying a five-year PEG ratio of 0.6, recent performance has not been particularly strong. Specifically, in the first quarter of 2013 Oil States reported a small decline in revenue versus a year earlier with earnings dropping by 24%. As such we’d hesitate to consider the stock a good value based on its current makeup. Chuck Royce’s Royce & Associates was one major shareholder at the end of December, reporting a position of over 3 million shares (find Royce’s favorite stocks). Atlantic Investment Management, which is managed by Alexander Roepers, was a heavy buyer of Oil States International, Inc. (NYSE:OIS) in the fourth quarter of 2012 and closed the year with a total of 1.3 million shares in its portfolio (check out more stocks Atlantic was buying).