Published:
July 16, 2007
As we know, aggregating different
businesses into a conglomerate typically produces an unwieldy and
inefficient corporate structure, as well as sub-par stock market
performance. Sometimes, however, the opposite can also hold true --
breaking apart large firms into smaller more nimble companies often
unlocks shareholder value and produces superior market gains.
Don't believe me? Just consider this example...
PepsiCo (NYSE: PEP) is best known for its namesake carbonated
beverages and its Frito-Lay salty snacks group. These two businesses
are classic complements -- consumers tend to buy soft drinks and
salty snacks together. There are even synergies to be had in
marketing the brands in tandem.
However, a decade ago the company was also actively involved in
another business -- restaurants.
For many years, Pepsi owned three well-known fast-food chains: Taco
Bell, Pizza Hut, and Kentucky Fried Chicken (KFC). There was nothing
wrong with any of these chains, and all enjoyed strong brand name
recognition both in the U.S. and in dozens of other countries around
the globe. Nor are fast food and soft drinks totally unrelated
businesses -- after all, these restaurants also sold beverages.
However, by 1997 it had become clear that the task of managing a
fast food unit and that of managing a global beverage firm were
quite different. Pepsi believed that its restaurant subsidiary could
benefit from a separate dedicated management team that could
concentrate on expanding the chains' footprint into new markets. So,
on September 17, 1997, Pepsi's restaurant business went public on
the NYSE under the name Tricon Global Restaurants.
 Check out the chart to the right for a closer look at how Tricon,
later re-dubbed Yum! Brands (NYSE: YUM), has fared since its IPO in
late 1997.
As you can see, Tricon performed extremely well as a separate
entity. The new management team successfully expanded the chain into
high-growth markets like China; today YUM has even more outlets in China
than McDonald's (NYSE: MCD). In addition, YUM re-focused its attention
on marketing, coming up with innovative initiatives such as
packaging two or more restaurant chains into a single, convenient
location.
Since its IPO in 1997, YUM has delivered impressive growth, and the
stock has soared, returning more than +300%, versus just +85% for
the S&P 500 and just over +100% for its former parent PepsiCo.
Sound like an isolated example? It isn't. In fact, the
outperformance enjoyed by spin-offs is one of the most reliable patterns in the stock market today. A 2005
study by Lehman Brothers found that nearly nine of every ten (88%)
spin-offs between 2000 and 2005 outperformed the S&P 500 -- by an
average margin of +45% in their first two years as a public company.
In that vein, we think we've found one spin-off that is likely to
outpace the S&P in the coming years...
Western Union (NYSE: WU,
$20.66) -- Western Union is a worldwide leader in the
money transfer business. The venerable company was long considered
one of the crown jewels of payment processor First Data (NYSE: FDC).
Unfortunately, investors wanting a piece of Western Union also had
to buy into First Data's other franchises, most of which operate in
viciously competitive markets.
Because Western Union was lumped together with First Data's other
businesses, its growth prospects and investment potential were less
visible to investors. Since being spun-off late last year, the firm
is now a far more attractive and visible pure-play on the growing
money transfer market.
The company has only one real global competitor, MoneyGram (NYSE: MGI). Even
then, Western Union has roughly 300,000 agents around the world --
nearly three times as many as MoneyGram. Western Union
also has operations in almost 200 countries, giving it a much
broader international reach than its smaller rival. The size and
coverage of Western Union's extensive global network makes it the
company of choice for sending money abroad -- this has given the
firm a powerful competitive advantage.
The money transfer business is primarily driven by remittances made
by immigrants to relatives abroad. According to the United Nations,
there are currently more than 191 million people living outside
their home country. Close to 40 million of these people are in the
U.S. alone. Many of these immigrants come to the U.S. seeking higher
wages to support their family back home. And because relatively few
of these families have bank accounts, the easiest way to send cash
across the planet is by fast, inexpensive wire transfer.
We expect this trend of sustained immigration to continue, which
should lead to higher and higher money transfer volumes in the years
ahead. Western Union is the highest quality and most direct play
on that trend.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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About Paul Tracy
Paul Tracy co-founded StreetAuthority.com and became the firm's
Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in
2006. Prior to that he spent several years as Managing Editor at a multi-million
dollar financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also responsible
for equity research and managing a team of seasoned professional financial
writers, researchers and market commentators.
Paul's previous experience includes a position at Robert W. Baird & Co.'s
full-service brokerage operations as well as economic research work on a Money
and Banking project funded by the National Bureau of Economic Research. He has
also spent time doing outside consulting and research for the University of
Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
the U.S.
Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
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