Matt Franz : Zealous For Knowledge

Einhorn On Recent Spinoffs

The most recent Greenlight Capital letter discussed two recent spin-offs. The first was Consol Energy, which I wrote about here (disclosure: long).

Our second biggest winner in the quarter was CONSOL Energy, which completed the long awaited spin-off of its coal business, CONSOL Energy (CEIX), from its natural gas business, since renamed CNX Resources (CNX). Both companies have high quality resource positions, first quartile cost structures and strong management teams. We expect the spin will result in both companies having enhanced growth opportunities, reduced complexity and more natural analyst coverage and investor bases. CNX trades at less than 6x 2018 EBITDA and CEIX trades at less than 5x 2018 EBITDA.

The second is Metlife, which has under-performed the market since its spin-off:

We initiated a large long position in Brighthouse Financial (BHF) at an average of $57.92. BHF was spun out of MetLife and was formerly most of MetLife’s U.S. Retail business, selling annuities and life insurance. BHF appears to be a traditional spin-off – an underperforming and unloved part of a larger, more successful company. The tone of the spin-off road show was noticeably downbeat, with management advancing a business plan that does not sound particularly exciting for shareholders. Notably, despite very conservative capitalization and high risk-based capital levels, the base expectation calls for no capital return until 2020. The result is a valuation of just 56% of book value and 6.4x 2018 EPS estimates.

There are many stocks today that don’t appear to have any cushion built in for a bear market. We are short quite a few of them, but on BHF, analysts are laser focused on the downside from a bear market. That seems too pessimistic. The converse of the downside of adverse capital markets is the upside to favorable markets. The flow-through from favorable capital markets, possibly combined with better-than-forecasted execution typical of spin-offs of this type, should yield an ability to return capital much sooner than expected. With the shares trading at approximately a 40-50% discount to similar companies with normal capital return policies, there is plenty of upside to the shares as the market begins to discount normalization. Management is well incentivized if the shares appreciate. BHF shares ended the year at $58.64.

Subscribe: rss | email