After DuPont spun off paint manufacturer Axalta in 2012, the new stock initially spiked before spending a year trading sideways. This year, AkzoNobel expressed interest in buying Axalta, and Axalta’s stock surged.
It’s no secret that CNBC’s Jim Cramer loves corporate breakups, but spinoffs, when a company separates from a smaller, undervalued segment, are slightly different.
“Look, not every spinoff is a success. I mean, it’s just not that easy, right? But if you know what to look for, a good spinoff can often became a big winner,” the “Mad Money” host said. “So let’s talk about what works in a spinoff, what leads to an Axalta-type situation, and who could be the next Axalta.”
Cramer recommended Chemours for speculation in 2016 because its core business, titanium dioxide, started showing signs of a turnaround, and the new entity’s management was aggressively cutting costs.
“My only regret is that I didn’t pound the table even harder,” Cramer said. “Since then, Chemours has vaulted from $7 to $55. That’s a 647 percent gain, monster, crushing the performance of the broader market and its old parent company.”
Cramer also got enthusiastic when Johnson Controls spun out Adient, its automotive seating business, in October 2016. He recommended Adient’s stock in January of this year, and sure enough, it has rallied 41 percent since, outpacing both Johnson Controls and the S&P 500.
“That’s after Adient’s stock sold off hard [Thursday], down 5 percent when the company reported what many people thought was a disappointing quarter,” Cramer said. “I didn’t see anything wrong with it. This might be the buying opportunity.”
Not every spinoff works right away though, Cramer said, turning back to Axalta. Private equity giant The Carlyle Group bought Axalta from DuPont in 2012, taking it public shortly after.
Shares of Axalta surged until mid-2015, when sales weakness and Carlyle selling its majority stake in Axalta put pressure on its shares.
Since then, the stock has traded mostly sideways, even after Valspar sold its North American coatings business to Axalta cheaply as a part of its merger with Sherwin-Williams.
But chemical giant AkzoNobel’s interest in Axalta restored the stocks momentum. Axalta shares popped 22 percent on the news, even as the company had just reported a sub-par quarter.
“Which brings me, again, to the other reason I love spinoffs: They can make very attractive takeover targets,” Cramer said. “Often times, a big conglomerate will resist selling off one of its divisions to a competitor, but split that division off as a separate company, give it its own board of directors and its own shareholders, and suddenly, they become a lot more amenable to a takeover.”
Where can investors find the next spinoff winners? Cramer pointed to Honeywell’s plans to spin off two of its segments, car parts and home systems, into separate companies; DowDuPont’s three-part breakup; and FMC Corp.’s potential spinoff of its lithium arm.
“Here’s the bottom line: Spinoffs can be very lucrative. Even when they don’t seem to be working, you can win anyway, maybe from a takeover if the stock just sits there like we saw in Axalta,” the “Mad Money” host said.