“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
STARBUCKS CORP. $57(Nasdaq symbol SBUX; Consumer sector; Shares outstanding: 1.4 billion; Market cap: $79.8 billion; Dividend yield: 2.1%; Takeover Target Rating: Low; www.starbucks.com) is a leading seller and roaster of specialty coffee.
As of April 1, 2018, Starbucks had 14,812 company-operated stores and 13,397 licensed outlets in 77 countries. That’s makes for a total of 28,209.
Stores in the Americas supply 67% of its sales, followed by China and the Asia-Pacific region (20%), and Europe, the Middle East and Africa (4%). The company gets a further 8% of its sales by selling coffee and other beverages through supermarkets and 1% from online sales and other activities.
Starbucks recently acquired 100% ownership of a Chinese joint venture after paying $1.4 billion for its partner’s 50% stake. That firm operates 1,477 stores in eastern China, including Shanghai, the country’s biggest city.
As a result of that purchase, Starbucks now has 3,300 stores in China. It aims to expand to 6,000 outlets by the end of 2022.
Owning 100% of its Chinese operations makes it easier for Starbucks to eventually spin off that business as a separate firm. So far, the company has indicated that it plans to hang on to those operations. However, that could change in light of Yum Brands’ successful spinoff of Yum China (see page 47).
Starbucks is also finding other ways to unlock value. For example, it recently formed a new alliance with Swiss food giant Nestlé S.A.
Under the terms of that deal, Nestle will acquire the exclusive worldwide rights to sell Starbucks-branded coffees and teas in supermarkets and other food retailers. In exchange, Starbucks will receive cash of $7.15 billion. The two companies expect to complete the transaction in the next few weeks.
Starbucks plans to put the cash toward $20 billion in share buybacks and dividends by the end of fiscal 2020 (fiscal years end September 30). The current annual dividend rate of $1.20 a share yields 2.1%.
Starbucks is a buy.
USG CORP. $42(New York symbol USG; Manufacturing & Industry sector; Shares o/s: 139.7 million; Market cap: $5.9 billion; No divd. paid; Takeover Target Rating: Highest; www.usg.com) makes gypsum wallboard (drywall), wallboard finishing materials, tile backers and underlayment, and ceiling tiles.
Germany’s Knauf Group holds a 10.5% stake in USG, and is its second-largest shareholder behind Berkshire Hathaway Inc. (New York symbols BRK.A and BRK.B) It owns 30.8% of outstanding shares.
Knauf recently offered to buy USG for $42.00 per share. The company rejected the bid as too low. However, after weaker first quarter earnings, USG’s board has authorized management to conduct negotiations with Knauf.
In the first quarter of 2018, USG’s sales rose 2.5%, to $786.0 million from $767.0 million a year earlier. However, earnings fell 16.4% to $46.0 million, or $0.32 a share, from $55.0 million, or $0.37, a year earlier. That’s mainly due to lower sales of higher-profit-margin wallboard.
USG’s outlook is sound: it continues to benefit from a rebound in U.S. housing starts. The company has also expanded into higher-profit areas like premium, lighter-weight wallboard. In addition, it has lots of room for cost cutting.
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