UTX: Ideal Time to Play This Large Cap Break-Up Identified
As the entire market awaits this upcoming April 2020 3-way break-up of Carrier Global Corp. (CARR) and Otis Worldwide Corp. (OTIS), the Spins may see short-term pressure due to the negative sentiment surrounding the amount of debt received. However, with the potential for mispricing in the when-issued market, we’re taking a small stake in United Technologies Corp. (UTX) to receive all three new companies in order to play this iconic split.The Edge Intelligence...
Our proprietary data shows that this type of large cap Spinoff transaction holds a strong opportunity to make money and also outperform the index. Along with our pre and post-Spin analysis, we recommend a small initial entry going into the Spinoff with the opportunity to re-weight on any mispricing (due to a negative sentiment by the market based on the higher debt and those only wishing to own a pure-play aerospace company) and a fuller position 3-months after its Spinoff date.
What Does the Spinoff Data Say?
While the past events highlighted in our “Decade of S&P 500 Listed Spinoffs†isn’t a prediction of future performances, we view our valuable data as a good measuring stick to help uncover the edge in upcoming situations, in particular the S&P 500 listed 3-way split in UTX.
In examining the last 10 years of Spinoff data, there have been 23 US break-up cases where the Spinoff was big enough and fit the eligibility to enter the S&P 500 Index. This figure is out of the 194 US break-ups over the same 10 year period, meaning only 12% of all Spins end up in the S&P 500 or, looking at it another way, just over one new S&P 500 listing a year from a Spinoff transaction over the last 10 years.
As these are rare events, and UTX being only one of the few companies on the US Calendar with Spinoffs big enough to list on the S&P 500 for 2020 (out of a total of 22 US break-ups), we decided to dig deeper into the numbers to find out what this can mean for investors.
The Edge View...
Raytheon Technologies Corp. (RTX, Parent-Merged Entity): Post-merger, RTX will be a leader in the commercial and military aviation market with the second highest margin profile among its peers (FY21E EBITDA margin profile of 18.9%), only behind Honeywell’s (HON) overall EBITDA margin profile of 25%. In addition, the company’s favorable FY21E leverage position at 1.6x (in-line with its peer and lower than the current UTX’s 2.8x) remains a key positive. Though Pratt & Whitney’s GTF Engine (PW1000G) current troubles will remain with RTX for some time, the expected resolution of these issues in the next couple of years will bring additional growth to RTX. Therefore, we remain positive on RTX (Parent post-merger).
Carrier Global Corp. (CARR, Spinoff): CARR will be one of the leaders in the HVAC and climate control space. However, the high leverage profile of 3.3x compared to its peer average of 1.7x (Daikin: 0.6x, Lennox: 2.3x, Midea: 0.5x and IR: 1.8x) and low growth of an average 0.8% in FY20E and FY21E (lower than its peer average of 4.6%) remains a concern for the company once it has been separated.
Otis Worldwide Corp. (OTIS, Spinoff): OTIS will have a strong position to capitalize on growth potential in China. Additionally, it has a leading market positioning (17% share), higher EBITDA margin profile of 15.9% in FY21E compared to its peers (Kone’s 15.5% and Schindler’s 14.3%), and long-term cash flow visibility based on longer-term service contracts, which offer a compelling opportunity for investors.
Raytheon, together with its subsidiaries, is a technology company, focused on defense and other government markets. The company has five segments: Integrated Defense Systems, which is engaged in integrated air and missile defense; large land- and sea-based radar solutions; command, control, communications, computers, cyber and intelligence solutions; Intelligence, Information and Services, which provides technical services to intelligence, defense, federal and commercial customers; Missile Systems, which produces missile and combat systems; Space and Airborne Systems, which develops integrated sensor and communication systems for missions; and Forcepoint, which develops cybersecurity products.
United Technologies provides technology products and services to the building systems and aerospace industries. The company has four segments: Otis, which designs, manufactures, sells and installs passenger and freight elevators; Carrier, which provides heating, ventilating, air conditioning refrigeration, fire, security and building automation products; Pratt & Whitney, which supplies aircraft engines for the commercial, military, business jet and general aviation market; and Collins Aerospace Systems, which provides aerospace products and aftermarket service solutions for aircraft manufacturers, airlines, regional, business and general aviation markets, military, space and undersea operations.
The Edge Group - Global Fundamental Catalyst Investing. The Edge provides investors with access to hidden corporate value from Global Special Situations using a pioneering approach to investments. Founded in 2005 by fund management and investment banking professionals to provide high quality, private equity-level research on Global Corporate Divestitures for the benefit of fundamental event-driven, growth and value-oriented investors in this difficult to track, but proven investment space.
The Edge will look to screen and analyze include Spinoffs; Reverse Morris Trusts; Squeeze Outs; Privatizations; Demutualization; Deep Discounted; Rights Issues; Rights Offering; Restructuring; Insider Purchases / Buying Change of Management / CEO Change; Deteriorating fundamentals; Post-Bankruptcy; Reorganization; Tender Offer; M&A Deals; Secondary Offering; Share Swap; Thrift Conversions; Share Buybacks; Activist; Mergers. All analyzed from a fundamental point of view.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.