Spinoff Dumpster Diving: $MBC MasterBrand Edition
While money can be made sifting through unloved spinoffs, there is usually cause for concern.

However -- and though it is unloved -- MasterBrand is a rare market leader that has spun off from Fortune Brands Home & Security (now $FBIN Fortune Brands Innovations).

And I think it looks interesting. (?)

But first, what makes MasterBrand unloved, specifically?

Spinoff Things

Foremost, it is spinning off from Fortune Brands, which was a dividend payer. Since MBC doesn't plan to pay a dividend immediately, holding it is useless for most income-focused investors.

Second, FBIN and MBC were removed from the S&P 500 Index as their market capitalizations were too small post-spinoff. Without the "forced buying" for S&P 500 ETFs and mutual funds, the two stocks (very much so with MBC) are left to go without massive institutional buying like before.

Finally, MBC will carry $950M in debt while only having a market cap of around $1B, which is always a great way to scare away investors. However, with the figures presented below, I am comfortable facing this debt load.

Quantitative Excitement

Digging through MasterBrand's prospectus, I was pleasantly surprised to see that its GAAP net income (NI) and operating cash flow (OCF) were the following for the last three years:

  • Last 12 months - $175M NI and $180M OCF
  • 2021 - $183M NI and $148M OCF
  • 2020 - $146M NI and $205M OCF
  • 2019 - $101M NI and $149M OCF

Averaging these out a bit, Master Brand trades at about 6-7 times GAAP earnings and OCF.

Qualitative Support

This valuation is meaningless if MBC's operations are ugly, but it is a steady-Eddie type in a leadership position in the sexy world of cabinet manufacturing.

  • $3.2B in sales gives them a 24% share of the market
  • Their next-biggest peers are 16% and 15% of the market, with the remaining 45% coming from over 11,000 competitors
  • Two-thirds of MBC's sales come from remove and replace remodeling, while the rest comes from new construction, insulating it a bit from the housing market.
  • Now separate, MBC will digitize its processes, run leaner operations, boost margins, and eventually focus on M&A activity, accumulating some of its 1,000's of tiny competitors.
  • Incremental organic CAGR of 4-5% over the long haul

Ultimately, MasterBrand isn't the wildest spinoff we will ever find, but that is also its appeal.

Do any other spinoff-friendly humans out there find this one interesting?

Or anything you think I missed or need to worry about?
Which stock in a spinoff situation do you prefer?
57%The parent company
14%The spinoff
14%Whichever one the CEO goes to
14%Whichever faces forced selling
7 VotesPoll ended on: 1/19/2023
Joey Hirendernath's avatar
This is an interesting one but I guess the best course of action for DD is to understand the reasons why the spin-off happened in the first place.

I guess speaking generally spin-offs tend to outperform for a few reasons. Management teams at the spin-offs have greater incentive to produce, have greater freedom to start new ventures, rationalize operations, and trim overhead. Meanwhile, management teams at parent companies can focus more on core businesses. Shares in spin-offs and parents both appear to be worth holding. However, if one has to be sold, study findings suggest that, because of its smaller margin of out-performance, on average, the parent should get the ax.
Josh Kohn-Lindquist's avatar
@joeyhirendernath Very well explained, Joey 👍

A lot of those points that you bring up are exactly what makes this corner of the market fun to look at.

I also think MasterBrand has a lot of the qualities you mentioned.

Individual investors tend to have a freedom of will advantage over institutional investors and special situations like this act as a multiplier on that effect it seems.



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