One Spin-Off Stock We're Excited To See
Updated: Jul 4, 2019
Subsidiaries that split from their parent companies often end up performing much better on their own. Here is one future spin-off company we're very excited about.
The talk of the town is spin-offs. With the Department of Justice (DOJ) and Federal Trade Commission (FTC) both sticking their noses into Big Tech’s business, we could have the chance to invest directly in Instagram, or Amazon Web Services, or even YouTube in the not-too-distant future. This is great news for investors, as spun-off companies have a history of doing quite well. You can look back at the success of PayPal (NASDAQ: PYPL) as the most prominent example of this, but for a broader view, take the Bloomberg Spin-Off Index, which has absolutely crushed the S&P 500 since its inception in 2003, returning approximately 973% versus the S&P’s 342% as of March 2019.
What makes spin-offs perform so well? The most rational theory is that having split from a larger parent, spin-offs can focus on their core competencies and explore avenues of growth that the parent company ignored. One spin-off that we already know is going to happen has got us particularly excited (even though it’s admittedly not a very exciting company).
That company is Otis, the world leader in elevator, escalators, and moving walkways. The 160-year-old company was founded by Elisha Otis, who didn’t invent the elevator but invented something almost as important — the elevator safety brake. It was his demonstration of this brake at the 1853 New York fair that paved the way for the first skyscrapers and helped convince people to actually use these potentially deadly contraptions. Otis has been a wholly owned subsidiary of United Technologies (NYSE: UTX) since 1976. However, the parent last year announced plans to spin-off both Otis and Carrier (their heating, ventilation, and air conditioning business) in 2020. This, United says, will allow them to focus on their aerospace and defense businesses, having recently acquired Rockwell Collins and Raytheon.
So why Otis?
Well, elevators are a pretty good business to be in. A building is built, an elevator is installed, and the company then gets to generate long-term recurring revenue through maintenance. And the best part is, once an elevator is in, it’s not coming out.
How’s that for sticky?
Otis is currently the market leader amongst what is called the “Big Five” with the strongest brand in the space, highlighted by their industry-leading margins. United Technologies has failed to invest in the business over the last number of years, however, leading them to lose ground to rival Kone (HEL: KNEBV) in the lucrative Chinese market, but a focussed management team with autonomy could easily reverse this trend.
For a comparable business, look no further to Schindler Holdings (SWX: SCHP), a Swiss competitor whose stock has increased almost 20-fold since going public back in 1995.
It may not be the most exciting company, but those are some exciting returns.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in PayPal. Read our full disclosure policy here.