Stock spinoffs typically don’t do well initially. Unloved by shareholders of the former parent company, often misunderstood by the market and sometimes laden with debt or other baggage the parent no longer wanted to carry, spinoff stocks can take time to find their footing.
Yet such strategic investments represent an opportunity for savvy investors. If the spinoff falls out of the gate, it may be a great time to pick up discounted shares. Then hold on through the initial turbulence until the company works out the kinks of being set free.
Below are three stock spinoffs set to occur in the months ahead. Let’s look more closely at them to see whether they are worth your investment dollars.
Sanofi (SNY)
France-based pharmaceutical stock Sanofi (NASDAQ:SNY) is following in the footsteps of others in the industry by spinning off its consumer health business.
Johnson & Johnson (NYSE:JNJ) spun off Kenvue (NYSE:KVUE); Pfizer (NYSE:PFE) reduced its stake in Haleon (NYSE:HLN), a joint venture between it and GSK (NYSE:GSK); and Novartis (NYSE:NVS) spun off Sandoz (OTCMKTS:SDZNY).
Sanofi wants to shed the unit that owns brands such as Allegra allergy medicine, Gold Bond talcum powder and IcyHot pain relief products. While it initially was planning on a spinoff, it is entertaining bids for a private equity purchase of the business. Sanofi is moving ahead on both fronts, not willing to let an opportunity escape it.
According to Bloomberg, bids for the $20 billion business could come from Blackstone (NYSE:BX), Clayton Dubilier & Rice, CVC Capital Partners and TPG (NASDAQ:TPG). Sanofi has sold off a number of its consumer health brands over the past few years after CEO Paul Hudson took over in 2019.
Yet there is value to be realized in the consumer health brands should a spinoff go forward. As they are well known and trusted by consumers they offer significant growth potential. It is likely why they are attracting a lot of private equity attention and would be an attractive spinoff stock.
Unilever (UL)
U.K.-based Unilever (NYSE:UL) wants to spinoff its ice cream business. Comprised primarily of Ben & Jerry’s brand as well as Magnum, the consumer staples stock wants to focus more on its core business to accelerate growth and increase profit margins.
Unilever believes its ice cream business is a world-leading business whose brands offer growth potential. CEO Fernando Fernandez told analysts earlier this year the business “was a clear outlier in our portfolio with a different margin structure, less cash conversion, and of course a completely different channel profile.”
It tends to be a seasonal one, too. By spinning it off, a more focused Unilever can improve its sales growth, profit margins, return on assets and cash conversion.
Yet that doesn’t sound all that enticing to investors. If getting rid of the business improves the parent’s operations so much, it suggests the spinoff will be a slow-growth, low-margin company. However, Unilever said it would entertain other ways of getting rid of it too. Presumably, that includes someone buying it like private equity wants to do with Sanofi’s consumer health unit. There haven’t been any takers yet, which also suggests little interest in buying up such an anchor.
If and when Ben & Jerry’s goes public, investors may want to avoid the stock, even if they might want to sample its ice cream.
Howard Hughes Holdings (HHH)
The third spinoff stock to consider is real estate development company Howard Hughes Holdings (NYSE:HHH). The company, which is not a real estate investment trust (REIT), is spinning off its Seaport Entertainment. The business owns properties such as the South Street Seaport in Lower Manhattan, the Las Vegas Aviators minor league baseball team and an 80% interest in the air rights above the Fashion Show mall in Las Vegas. Seaport has proposed building a casino on the Las Vegas Strip over the mall. The business also owns Jean-Georges Restaurants, an upscale dining concept.
The purpose of the spinoff is so Howard Hughes can be a pure-play real estate company focused on its portfolio of master planned communities (MPC). As the name implies, MPCs are carefully curated communities that offer a mix of residential, commercial and natural spaces with many communal amenities provided, such as fire services. Howard Hughes Holdings owns numerous upscale MPCs around the country, including in Houston, Maryland, Las Vegas, and Honolulu.
There is a draw for Seaport Entertainment in that it combines real estate with entertainment. The South Street Seaport, for example, used to be an important historic fishing port. It has since converted into restaurants, clubs and other entertainment venues. While ESPN does broadcast some of their shows from the Seaport, they are reportedly ending them by 2025.
Howard Hughes has lost a quarter of its value this year. Calving off Seaport Entertainment could create value for investors. Seaport itself may offer attractive investment potential too considering the prime locations of its properties.
On the date of publication, Rich Duprey held a LONG position in JNJ stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.