ITT Follows Tyco & Fortune, The Great Break-Up (ITT, FO, TYC, TEL)

ITT Corporation (NYSE: ITT) after the same strategy recently announced by Fortune Brands Inc. (NYSE: FO) and what Tyco International Ltd. (NYSE: TYC) did in 2007.  The company is splitting itself up into three separate units.  While we are of course showing what each three units will look like, we wanted to see how Tyco and Fortune Brands have done since their moves.

The company’s its board of directors unanimously approved this plan to separate into three different publicly traded companies. These are also expected to be tax-free spin-offs for its shareholders.  ITT is spinning off its water-related businesses and its Defense & Information Solutions segment.  Under the plan, ITT shareholders will own shares in all three corporations after the completion of the transaction and the company expects to complete the plan before the end of the year. ITT will continue to trade as an industrial company in aerospace, transportation, energy and industrial markets.

As a manufacturer of highly engineered industrial products and high-tech solutions: ITT’s global platform will include ITT’s current Industrial Process business, as well as its Motion Technologies, Interconnect Solutions and Control Technologies businesses. It will have an extensive portfolio of advanced technology industrial pumps, valves and control systems serving the oil and gas, mining, chemical, power generation, and pulp and paper markets. ITT will also continue in specialized and harsh-environment connectors, aerospace valves, actuators and components, shock absorbers, brake pads and other energy absorption solutions.  Nearly 60% of its revenues are from international operations and emerging markets and pro forma 2011 revenue for the future ITT Corporation is estimated at $2.1 billion.

A global water technology leader: A standalone water technology corporation will be here with a new corporate brand name will be formed through the combination of three of ITT’s current businesses: Residential & Commercial Water, Flow Control and Water & Wastewater (including biological, filtration and disinfection treatment and analytics). The portfolio will span the transport, testing and treatment of water and will focus on residential, commercial, municipal, agricultural, construction, building services, dewatering, beverage and leisure marine markets, as well as analytical instrumentation for water and wastewater, environmental, medical and beverage applications. Approximately 55% of the water unit’s revenues come from international markets and it shows strong emerging market growth prospects.  Pro forma 2011 revenue for the future water technology business is estimated at $3.6 billion.

A highly engineered defense technology and information solutions provider: The existing Defense & Information Solutions segment will be renamed and rebranded as a new company servicing the global military, government and commercial customers; and products and services will include next generation night vision, integrated electronic warfare, networked communications, force protection, radar, global intelligence, surveillance and reconnaissance systems, composite structures, space-based satellite imaging, weather and climate monitoring, and navigation and imaging systems, as well as maintenance, engineering and professional services.  Nearly 30% of revenues are already coming from adjacent markets outside of the Department of Defense, such as air traffic management, information and cyber-security as well as strong international growth prospects.  Pro forma 2011 revenue for the new defense and information solutions business is estimated at $5.8 billion.

Right before the open, ITT shares are up 20% at $63.62 after a $52.78 close.  This move may be factoring in all the great news at once.  Its pre-pop market cap was $9.7 billion and its prior 52-week range was $42.05 to $57.99.  ITT shares peaked at roughly $70 in 2007 and it is interesting that analysts had a consensus price target of only $58.81 before this action was announced.

Tyco International Ltd. (NYSE: TYC) broke itself up in 2007 and its shares are just now back at close to the same level at $43.59 today.  Tyco’s performance was, of course, affected by the Great Recession, and that makes it more difficult to compare.  Ditto for the Tyco Electronics, Ltd. (NYSE: TEL) unit.

Fortune Brands Inc. (NYSE: FO) just announced its plan for a sale or break-up in November.  In that move, its shares went from roughly $54 to $58 on the news, but shares now sit above $62.00 for a total gain of roughly 15% from start to present.

We can’t really draw a parallel between ITT and Tyco other than that their charts now look very similar if you factor in the big ITT gains from this morning.  The problem is that many of those analyst calls should consider a sum of the parts scenario and the stock is now above the consensus price target range of analysts.  That being said, it sure looks like most of the goodwill and reward is being given to shareholders all at once.

Gabelli & Co. reiterated its “Buy” rating.  What will stand out in the Gabelli call is that it lists a fair market value of $89.00 for 2011.  If that $89 target holds true, then our take that the gain is being fully realized will have an opportunity cost associated with it.  As a reminder, rising tides (i.e. the stock market) tend to lift all vessels (i.e. stocks).

Another manufacturing conglomerate is playing Devo, and there is now yet one more great special situation for value and growth investors alike.

JON C. OGG