Barron's Actually Nailed This One
After digging out of the snow here in the Northeast this morning, I clicked on my CAPS portfolio to see that ITT's shares exploded to the upside. This is actually one that Barron's got right. Back in September it had an article about how ITT's stock is undervalued on the sum of its parts basis. Here's what I said about the company at the time:
With the wars, or at least the combat operations for the war in Iraq winding down (hopefully), and major budget deficits, defense stocks have been beaten up pretty badly lately.
One that's starting to look really attractive on a sum-of-the-parts basis is ITT Corp (ITT). This week's Barron's contains a positive write-up on the company.
ITT is not just a one-trick defense company. It derives nearly a third of its revenue from Fluid Technologies and another 12% from Motion and Flow Control operations.
Both of these divisions have been reporting solid growth. If one values them at 10 to 11 times EBIT their combined value comes in at $7.5 to $8 billion versus an enterprise value of $9.3 billion for all of ITT.
If one assumes that the above valuations are reasonable, ITT's defense business is only being valued at $1.8 billion. That's pretty cheap for a company that's expected to report $650 to $730 million in EBIT in 2010. If one was to apply a conservative multiple of 6 to 7 times EBIT for the defense business it would be worth $4 billion to $5 billion.
The Barron's article pegs ITT's fair value per share at $55 to $60.
There's a lot of assumptions about future earnings and what multiple people are going to be willing to pay for them going on here, but the bottom line is that ITT is still a quality company that pays a dividend that's trading for a fairly cheap price after its recent drop.
With today's huge pop, ITT is now sitting at the high end of where the author of that article pegged its value several months ago. I'm staying long the company in CAPS however because I think that there's more upside. This will be a really cool situation. Too bad I was only in thias one in CAPS and not real life before today's huge gain.