TMFDeej (99.47)

This Stock Spinoff Looks Like a Good Trade

August 09, 2011 – Comments (1) | RELATED TICKERS: ITT

Here's a link to a recently published article by former Fool Ryan Fuhrmann about ITT, a stock which I currently own for the exact reasons that he describes in the piece. In the aftermath of the recent market implosion, one can get ITT today for 10% to 15% less than my current cost basis. Grumble, Grumble. I wouldn't be grumbling if I didn't already have a full position in it ;).

This Stock Spinoff Looks Like a Good Trade

Action to Take --> ITT currently trades at a very reasonable forward price-to-earnings (P/E) ratio of 10.6, which happens to be right in line with rival defense firms. In contrast, leading firms in the water industry trade at forward P/Es closer to 16, while the largest firms in the industrial segment trade closer to 12 times earnings expectations for the coming year.

This fully supports management's thesis that Xylem and the new ITT Corp should eventually see higher valuations when they are independent. Overall, there should be considerable potential to make money in ITT's break up. Each of three firms will likely be better run as independent companies and there is plenty of room for multiple expansion when the market better realizes the value of the water and industrial businesses. Finally, I see the potential for a rival defense, water, or industrial firm to swoop in and buy out one of these coming spinoffs at a hefty premium.

Deej