spin off

ADVANCED MICRO DEVICES INC. $41 (New York symbol AMD; WSSF Rating: Extra risk) is the world’s second-largest maker of computer processor chips after Intel Corp. The company also makes flash memory chips through Spansion Inc., a joint venture with Japan’s Fujitsu Ltd. Flash chips retain data in mobile phones and other devices, even when a user turns off the power. However, overcapacity in the flash memory industry has hurt Spansion’s earnings in the past few years. That’s why AMD and Fujitsu sold Spansion shares to the public in December 2005. The sale cut AMD’s stake in Spansion, from 60% to 37.9%. AMD may hand out its remaining Spansion shares to its own stockholders in the next year or two. The Spansion sale generated a one-time charge of $110 million. If you exclude all unusual items, AMD earned $0.45 a share (total $205 million) in the fourth quarter of 2005. It lost $0.08 a share ($30 million) a year earlier. Revenue rose 38.5%, to $1.8 billion from $1.3 billion....

BARNES & NOBLE INC. $43 (New York symbol BKS; WSSF Rating: Average) is the world’s largest bookseller, with 824 bookstores in 50 states. It also sells books and other products over the Internet. In November 2004, the company handed out its 63% stake in video game retailer GameStop Corp. to its own stockholders as a special dividend. The spin-off hurt Barnes & Noble’s short-term prospects. But it also let it focus on improving profitability at its less-risky book selling business. In the nine weeks ended December 31, 2005, sales at its Barnes & Noble superstores rose 5.2% to $1.1 billion from a year earlier. Same-store sales grew 2.3%. However, sales at its B. Dalton mall-based stores fell 18.4% to $41.3 million as the company continued to close unprofitable outlets. On a same-store basis, sales at this division grew 3.0%. Sales at the online operation rose 1.0%, to $106.1 million....

AMERICAN EXPRESS CO. $55 (New York symbol AXP; WSSF Rating: Average) is one of the world’s largest financial services providers, with operations in over 130 countries. Its well-known credit card business accounts for roughly 90% of its revenue. The remaining 10% comes from its travel services business. In September 2005, Amex handed out all of its shares in subsidiary American Express Financial Advisors (now called Ameriprise Financial Inc.) to its stockholders as a tax-deferred dividend. As part of the spin-off, it restructured its remaining operations. These moves cut its pre-tax profits in the three months ended December 31, 2005 by $65 million. However, it also received a $60 million gain from a tax settlement. To put these figures in context, Amex earned $0.60 a share (total $751 million) from continuing operations in the fourth quarter of 2005, up 13.2% from $0.53 a share ($669 million) a year earlier. Revenue grew 8.5%, to $6.4 billion from $5.9 billion....

FREESCALE SEMICONDUCTOR INC. (New York symbols FSL $27 and FSL.B $27; WSSF Rating: Extra risk) makes chips for a wide variety of products such as automobiles, computer networking equipment and wireless communication equipment. Motorola accounts for 30% of its total sales. In the past few months, Freescale has done a good job of cutting its costs. That helps explain why its profit in the fourth quarter of 2005 jumped to $0.45 a share (total $192 million) from $0.01 a share ($5 million) a year earlier. The latest quarterly results included an $8 million reversal of a previous writedown, while the 2004 fourth quarter included $84 million in one-time charges related to the spin-off from Motorola. Revenue rose 3.5%, to $1.48 billion from $1.43 billion. Like most technology companies, Freescale spends heavily on research, typically around 20% of its revenue of $13.80 a share....

When a company sets up one of its subsidiaries or divisions as a separate company and hands the stock out to its investors as a special dividend, it tends to unlock hidden value. Over time, the combined value of the post-spinoff parent and spun-off company usually exceeds the value of the parent before the spin-off. Mind you, this is a general tendency, not a guarantee of continued profit. Nor does it provide protection against the effects of a bad market. During the Internet boom of a few years ago, for instance, many tech stocks spun off their Internet divisions. When that boom turned to bust, these Internet spin-offs plunged with the rest of the sector. Here is our updated analysis of spin-offs carried out by stocks we recommended. All three paid off and helped unlock some of the hidden value in the parent company. But not all of them are buys....

ALLTEL CORP. $63 (New York symbol AT; WSSF Rating: Average) has agreed to merge its traditional wire line local and long-distance phone operations with Valor Communications Group, so it can focus on its fast-growing wireless operations. Alltel stockholders will then receive one common share in the new wireless-focussed Alltel, plus 1.05 common shares of the new local/long distance-focussed Valor. Alltel investors will only be liable for capital-gains taxes when they sell their new Valor shares. Post-spinoff, Alltel will cut its annual dividend rate from $1.54 a share to $0.50, for a yield of 0.8%. But the new Valor will pay an annual dividend of $1.00 a share, so the spin-off will have little overall impact on the income from an existing Alltel holding....

AVAYA INC. $10 (New York symbol AV; WSSF Rating: Average) makes telecommunications equipment that helps over one million businesses and government agencies manage their phone and data networks. Avaya was a division of Lucent Technologies Inc. until September 30, 2000, when Lucent handed out its Avaya shares to its investors. Selling equipment accounts for about 47% of Avaya’s total revenue. The remaining 53% comes from equipment rentals, plus maintenance and other services. Overseas markets account for 40% of its revenue. The company’s expertise with traditional phone systems puts it in position to profit from the spread of VoIP technology. Many businesses are now upgrading their systems to handle VoIP, since it can greatly cut their long distance bills. Many Avaya customers are likely to stick with it when they migrate to VoIP, instead of trusting their phones to an untested equipment supplier....

Some investors fear that Voice over Internet Protocol (VoIP) will be the death of companies like Verizon, because it lets phone calls bypass the phone companies and travel over the Internet. We doubt that, since established phone companies are bundling services and taking other steps to maintain their profits. However, some companies are sure to profit from VoIP. Avaya is likely to be one of them. That’s why we are adding it to our WSSF Portfolio for Aggressive Growth. AVAYA INC. $10 (New York symbol AV; WSSF Rating: Average) makes telecommunications equipment that helps over one million businesses and government agencies manage their phone and data networks. Avaya was a division of Lucent Technologies Inc. until September 30, 2000, when Lucent handed out its Avaya shares to its investors....

BCE INC. $28 (Toronto symbol BCE; SI Rating: Above-Average) provides local and long distance telephone service to customers throughout Ontario and Quebec. Other services offered by the company include wireless communications, direct-to-home satellite television, Internet access and e-commerce. BCE also owns 68.5% of Bell Globemedia, the owner of CTV, The Globe and Mail and several specialty channels. BCE made $0.50 a share from ongoing operations in the three months ended September 30, 2005, down 3.8% from $0.52 a year earlier. Revenues rose 3.1%, to $4.95 billion from $4.8 billion. BCE still suffers from a “holding company” discount, and may spin off or sell more of its divisions to unlock its hidden value. The company recently agreed to sell most of its shares in computer consulting firm CGI Group back to CGI for $859.2 million. That still leaves BCE with $242 million worth of CGI shares, which it plans to sell in 2006. BCE has also agreed to sell most of its controlling stake in Bell Globemedia. It will receive $1.3 billion, and see its interest in Bell Globemedia fall from 68.5% to 20%....

H.J. HEINZ COMPANY $35 (New York symbol HNZ; WSSF Rating: Above average) rose more than 25-fold from the early 1980s through 1998. In the next couple of years, it dropped by nearly half. It has spent much of the current decade between $30 and $40. Its next big move is likely to be upward. Heinz is one the world’s biggest food companies, with sales in over 200 countries. It’s best known for its Heinz ketchup, which has 60% of the American retail market and 80% of the restaurant market. Other products include soups, beans, pasta sauces (Classico), frozen potatoes (Ore-Ida) and baby food (Plasmon). Overseas markets account for 55% of Heinz’s sales, and 45% of its profit. Heinz’s sales fell from $9.4 billion in 2000 (fiscal years end April 30) to $8.2 billion in 2002, after it spun off several slow-growth brands such as North American tuna and pet food to Del Monte Foods Inc. Sales improved to $8.9 billion in 2004....