This was agreed great read. I have had some spinoff’s which have been terrific holdings, but as usual there have also been a few clunkers.
I am familiar with $KNF but not the automotive spinoff. Typically, I don’t really follow that industry. However, I do feel more and more that hybrids are starting to gain more traction and seem like more logical approach given demographics, cities, etc. I will definitely take note and watch the stock. Thanks.
I avoid spin-offs for one simple reason. Invariably it seems that RemainCo loads up SpinCo with non-recourse debt before SpinCo is separated. This shows up in SpinCo's balance sheet as a jump in long term debt.
RemainCo uses the funds to pay a dividend to itself or its shareholders. SpinCo now has a crushing debt load that it has to pay down, debt that does nothing to increase the company's asset base or competitive position.
As a potential investor in SpinCo, this is tantamount to paying child support for someone else's kid. I have no interest in this and move to the next investing lead.
Thanks, Chris. Yes, SpinCos are often saddled with debt, which can make them unattractive in certain cases. If the SpinCo generates a lot of free cash flow and has good stewards of capital, it might take a few years to clear out that debt.
This is problem with categorical statements. PHIN simply does not have that much debt when it was spun off. The management is actually adding debt to buyback shares at a ridiculously low multiple and by YE 24 they’re only 1.2x net debt/EBITDA.
If we assume 2% growth for 10 years (which is lower than inflation, which in my view is very low given they have a good chunk in aftermarkets and commercial industrial are actually growing rather than shrinking like passenger. Afterwards perpetual growth is 1% again basically a shrinking biz. Give it a 10% WACC, my DCF yields 1,781 mm market cap or $41.44/share which is still higher than today’s close.
However, I’d argue 10% WACC is too high — their borrowing cost is 6.5% and considering a 25% debt it’s 4.9% cost of debt. Even with a 10% cost of equity which I argue is too high because aftermarket’s which is 50%+ of their operating profit now still yields 8.7% WACC. Aftermarket is stable, predictable, and even to some degree countercyclical. Anyways if we stick with 10% K(e) and assume it grows 2% for 10 years and then 1% in perpetuity we get 2,129 mm equity value or 49.51/share, 15% higher than current price.
Last but not least assume 3% growth for 5 years like the author suggested and 0% growth afterwards which I don’t agree with given they’re grabbing market share and now we are seeing EV growth in PV even slowing down dramatically, we still get 1.903 bil market cap or 44.27/share.
All this is assuming a 10% cost of equity — I’m happy with 10% per annum of return at this very stringent level.
With the out of cycle change of control clause, my guess is it gets bought by someone at north of $60/share.
This was agreed great read. I have had some spinoff’s which have been terrific holdings, but as usual there have also been a few clunkers.
I am familiar with $KNF but not the automotive spinoff. Typically, I don’t really follow that industry. However, I do feel more and more that hybrids are starting to gain more traction and seem like more logical approach given demographics, cities, etc. I will definitely take note and watch the stock. Thanks.
Keep up the good work.
Thanks!
Sorry for the garbled first sentence. Should have been “This was a great read.” I don’t know how agreed got in there. Such is life. 🤔
I avoid spin-offs for one simple reason. Invariably it seems that RemainCo loads up SpinCo with non-recourse debt before SpinCo is separated. This shows up in SpinCo's balance sheet as a jump in long term debt.
RemainCo uses the funds to pay a dividend to itself or its shareholders. SpinCo now has a crushing debt load that it has to pay down, debt that does nothing to increase the company's asset base or competitive position.
As a potential investor in SpinCo, this is tantamount to paying child support for someone else's kid. I have no interest in this and move to the next investing lead.
Thanks, Chris. Yes, SpinCos are often saddled with debt, which can make them unattractive in certain cases. If the SpinCo generates a lot of free cash flow and has good stewards of capital, it might take a few years to clear out that debt.
This is problem with categorical statements. PHIN simply does not have that much debt when it was spun off. The management is actually adding debt to buyback shares at a ridiculously low multiple and by YE 24 they’re only 1.2x net debt/EBITDA.
If we assume 2% growth for 10 years (which is lower than inflation, which in my view is very low given they have a good chunk in aftermarkets and commercial industrial are actually growing rather than shrinking like passenger. Afterwards perpetual growth is 1% again basically a shrinking biz. Give it a 10% WACC, my DCF yields 1,781 mm market cap or $41.44/share which is still higher than today’s close.
However, I’d argue 10% WACC is too high — their borrowing cost is 6.5% and considering a 25% debt it’s 4.9% cost of debt. Even with a 10% cost of equity which I argue is too high because aftermarket’s which is 50%+ of their operating profit now still yields 8.7% WACC. Aftermarket is stable, predictable, and even to some degree countercyclical. Anyways if we stick with 10% K(e) and assume it grows 2% for 10 years and then 1% in perpetuity we get 2,129 mm equity value or 49.51/share, 15% higher than current price.
Last but not least assume 3% growth for 5 years like the author suggested and 0% growth afterwards which I don’t agree with given they’re grabbing market share and now we are seeing EV growth in PV even slowing down dramatically, we still get 1.903 bil market cap or 44.27/share.
All this is assuming a 10% cost of equity — I’m happy with 10% per annum of return at this very stringent level.
With the out of cycle change of control clause, my guess is it gets bought by someone at north of $60/share.
Sounds like Tenzing MEMO needs to be updated to reflect the current nihilistic, degen markets we trade in! 😂