The remaining company will be a pure-play defense electronics business, aligned with the priorities of the Department of Defense. The business will have favorable growth, high margins, and a significant concentration of international and commercial customers.
The move, expected to be completed by this summer, looks smart. Peter Skibitski, an analyst at Drexel Hamilton, notes in a report that shares trade for an enterprise value to Ebitda multiple of six, a deep discount to the 8.5 times of large-cap peers. The spinoff, he thinks, will help remedy that. He puts the value of shares at $23, which is 30% above Tuesday’s closing price of $17.63, based on a multiple of eight.
Exelis has dropped a bit since the article was published so the upside is potentially even higher. Some other positives of the parent company highlighted include: higher profit margins (mid-teens vs. Vectrus’ 5-6%), high growth potential in international markets and a better revenue outlook (slower decline/stable vs. declining). Additionally, Vectrus is expected to pay a sizable dividend to Exelis which should provide the company with a nice cash balance to put to work.
Finally, the article suggests that given their respective profiles and positions, both companies could be takeover candidates:
Both companies could also become takeover targets, given that they will be attractive businesses in their own right. We recommend hanging on to Vectrus. In time, it, too, could generate handsome returns.
Hopefully, both companies will end up winners, but hanging onto Vectrus might not be a bad idea. Given the differences between the companies it might not mean much, but both Engility (EGL) and SAIC (SAIC), the ‘bad companies’, have outperformed their parent companies since being spun off.
Disclosure: Author holds no position in any stock mentioned.