Breaking up companies into smaller, independent entities is proving to be a winning formula for investors.
Spinoffs, often pursued to create shareholder value, have delivered extraordinary returns in 2024.
The Bloomberg Spinoff Index, which tracks companies separated from their parent firms over the past three years, has surged 63% this year—more than double the S&P 500’s 24% rise.
Several standout companies are leading the charge. Victoria’s Secret, spun off from Bath & Body Works, has gained 62% this year, while BellRing Brands, a former part of Post Holdings, has climbed 37%.
The crown jewel of spinoffs, however, is Constellation Energy, which was separated from Exelon in 2022 and has soared 95% in 2024 alone.
Not all spinoffs are created equal
While spinoffs have been largely successful, not every breakup yields stellar results.
In a Barron’s report, Trivariate Research’s Adam Parker points out that spinoffs involving companies in different industries than their parent firms tend to perform better, but high-quality companies should never do a spin.
“Something about breaking up a high-quality company creates dis-synergies,” he writes.
Recent examples highlight this divide. While GE Vernova, spun off from General Electric, has gained a staggering 154%, Kenvue, separated from Johnson & Johnson, has fallen more than 20% since its 2023 debut.
Similarly, Solventum spun off from 3M, has declined 17% this year, underscoring that spinoffs are not a guaranteed path to success.
GE Vernova: a spinoff success story
One of the most talked-about spinoffs of 2024 is GE Vernova, the renewable energy-focused unit of General Electric.
When Larry Culp took over GE in 2018, the company faced serious doubts about its future.
Culp’s strategy to split GE into three distinct businesses—GE Healthcare, GE Vernova, and GE Aerospace—has proven transformative.
GE Vernova, initially viewed as a “problem child,” has become a star performer, delivering a 154% return since its spin-off.
GE Aerospace has also shined, gaining 62% this year and 194% since GE Healthcare’s spin-off in early 2023.
These successes are setting a high bar for future spinoffs, making it easier for companies to pitch such moves to stakeholders.
Can Honeywell, and FedEx replicate GE’s success?
The success of spinoffs like GE Vernova has sparked a wave of new announcements from major corporations.
In the past month alone, companies like Honeywell, FedEx, and Comcast have announced plans to spin off divisions to unlock value and drive growth.
Honeywell, under pressure from activist investor Elliott Investment Management, is exploring strategic alternatives for its aerospace unit, a move that has excited Wall Street.
“We do believe there is upside simply on a sum of the parts basis…but more importantly, a simpler model should allow for better focus, prospective growth, and even higher valuation,” writes UBS analyst Amit Mehrotra, who has a Buy rating and a $298 price target on the stock, up 31% from Thursday’s close of $226.88.
FedEx has also announced plans to spin off its freight business, aiming to unlock the division’s value. The news drove the stock up over 10% in after-hours trading.
The optimism appears justified, as FedEx trades at 12.9 times its 12-month forward earnings, significantly lower than freight-focused companies like Old Dominion Freight Line and Saia, which command valuations exceeding 30 times earnings.
Ariel Rosa of Citigroup however has raised concerns about the plan.
In a note issued before the announcement, Rosa highlighted that FedEx’s freight business has lagged behind its peers in growth, potentially limiting its valuation.
Additionally, FedEx previously emphasised the synergy between its freight and express divisions, particularly in cross-selling services.
Splitting the two could pose challenges, making it difficult to achieve a clean separation and potentially driving customers to competitors.
Despite maintaining a “buy” rating on the stock due to its low valuation and other positive factors, Rosa expressed concerns about potential downside risks emerging in early 2025.
“While there is logic in spinning the business to unlock value, we see significant execution risk and remain unconvinced that a spin is in the best interest of long-term shareholders,” he wrote.
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