Patriot Transportation Holding (PATR) is splitting into two companies. At $335 million market capitalization and 10,389 in average (three months) volume, this is not a company that would be appropriate for institutional or high net worth investors. It is classified and best known as a transportation company, operating under the title Florida Rock and Tank, Inc. It is spinning off to what is creatively titled, New Patriot Transportation Holding (PATI). The company has been involved for a number of years in real estate and mining operations. These companies will remain under PATR, but be renamed FRP Holding and trade under FRPH.

PATI separates its revenue under the spin off documents into fuel surcharges and transportation revenues, which are both essentially the same items and have been consolidated here to keep with the continuity of reporting done in earlier periods.  As in other analysis done here, the latest data was used to ensure the most accurate information and comparable to other periods. The shares for the per share amounts were 9,718, which is the last reported share numbers. The split is expected to be a one for one share distributions to existing shareholders and will be all stock available will be distributed. Additionally, administrative costs were not reporting for the period 2006 and earlier, so 1,700 was used as an estimate. This was consolidated in the COGS amounts and the overall expense remains the same as what was reported. Unlike other spin offs, there will be no new debt the new entity will undertake and give back as a dividend prior to the distribution. In fact, nearly all of the management is leaving for the new entity as it will be clear from all prior obligations. To ensure it is properly capitalized, it will be given a line of credit with Wells Fargo for $25 million at 1.5% over Libor with potential reductions to the rate based on the debt to equity ratio.

PATI has almost not average revenue growth with strong cyclical swings. They state that 82% of revenues relates to petroleum transportation and the ten largest customer accounts for 54.2% of revenue. It has averaged 18% EBITDA with variance from 14-25% and 7% net income with variance from 4-12%. One would assume the reason that most of the management team is leaving and the spinoff is planned is to take advantage of the hypothesized upswing in transportation business. That said, the trailing twelve months does not show things are increasing, but instead are decreasing from the prior year-end. There seems to be little growth potential, but increasing in volume from existing clients. This would make sense as it is an established business with competitors providing a commodity like service. As the current margins are slightly lower than historical averages, using a valuation with current numbers would be a more conservative valuation. Looking at the following competitors, the valuation appears to be around $10 per share for this business line, which gives it a slightly lower multiple that it has now.

The mining and real estate operations will remain with the original business, and although management has not stated by management, the hope would be that management would create a more focused strategy as a REIT for these operations. For the analysis here, there will be a separation between mining and real estate for valuation purposes with an expectation that the real estate operations will continue and the mining operations will be dissolved or remain not the primary focus of the operations. Prior to 2007 interest and administrative expenses were not reported and estimates were used for the following chart.

The mining operation is primarily driven by one land lease, which accounts for approximately 74% of mining revenues. These mining operations substantially involve Vulcan Materials Company (VMC), who also has representation on the board. FRPH owns the land and has long term leases with VMC extracting sand to make concrete. VMC and FRPH then have a profit sharing of the sand extracted with FRPH holding the land for development purposes after the mining is completed. There will be substantial costs to be able to develop the land due to typical sand mining using open pit extraction although the contract states the mining will not deter development. The company states these pits will be used as water attractions. The residual land value of these tracks is excluded from valuation of the mining. Using the average sand extracted, average profit per ton, average profit margin, and 80% of estimated reserves (only current mining operations) to make the calculation more conservative, there can be a calculation of the value of the operation. These amounts have only been disclosed for the last three years, which have been years lower than prior extraction amounts. There was no upward adjustment for that fact to keep the valuation conservative. These values were discounted at 10%, which is several basis points higher than the company’s weighted average cost of capital due to the risky nature of the mining operation and joint venture. Given these values, the mining operation at $1.00 per ton, 4,700,000 tons, 269,508,000 tons in reserve, which implies 60 years of extraction, would result in $2.03 per share of value. This is less than the $3.12 per share the mining operation has as asset book value, which is a strong sign the operation needs to be discontinued.

The real estate valuations are typically based on FFO amounts, and average a multiple of 16x. FFO being net income with depreciation added back and gain on sales taken out, which would result in $0.81 per share for the trailing twelve months. This would imply a value of $12.96. There is some question as to that being the most appropriate valuation as the company has not been run as a REIT previously. This means there will most likely be some change to the portfolio to offer investors a more focused investment product. Additionally, there will be a change of leverage for the entity to engage in future real estate development. It is hard to imagine with all the costs of restructuring, which will not just be legal, but include restructuring of debt to allow for cash dividends, the future real estate growth would overcome the approximate 30% deficit with the current stock price. The current price given the above would imply an FFO growth of 48%, which would require more cash capital for growth than currently available. This means there is a potential shorting position available for those that do not agree with the one analyst following this stock according to Yahoo.

The contradictory titled Cash America International (CSH) is considered a credit service industry and typically tied to payday loans. Over the last several years the payday loan industry has faced increased scrutiny and regulations. Many states have passed laws reducing the rates below a sustainable amount given the high default rates. As a result many payday lenders have had losses for the last several years as they shut down offices in these states. Now federal agencies, in particular the US’s Consumer Financial Protection Bureau (CFPB) and UK’s Financial Conduct Authority (FCA), have taken on the payday loan industry. You can see the CFPB white paper here and the field hearing (town hall) is here. From the paper, it appears that 30-60% of all loans are paid or defaulted in the first sequence of loans given and a majority of customers extend their loans for long sequences of time. The focus of this white paper is only on these payday loans, although some testimony in congress suggests they have considered non-payday loan regulations as well; however, this was not discussed in any of the sample language provided to date. The concern of the CFPB appears to be people continuing to renew at greater amounts, thus finding themselves unable to get out of debt.

The UK has just passed regulation, which restricts the loan amount from becoming more than double the original loan and how lenders can advertise. FCA predicts this will reduce the payday loan industry by 40%. There were no restrictions on the rollover of loans, which the CFPB was fixated on. CSH has predicted investors should see the impact of the FCA regulations during the second half of 2014. They are also opening an office in London (previously only operating online there) as a sign of good faith as they work with FCA on ensuring compliance. The limitation on continuation of the loan will most likely only be limited until consumers realize they can switch companies to perpetuate the loans for longer time periods. If that occurs, there will be little change in loan volume industry wide.

The income statement goes back to the change in reporting period of operating units. The data from the spin off reporting was used for Enova and the difference from the consolidated reporting was placed in the other section. The per share calculation was based on the 33,000 shares per the spin off.

At first glance this has value investment potential, but the driver for lower value is the regulations described above. The belief is that the pay day lenders will be regulated out of business or at least will have their services dramatically reduced. The evidence of what is being proposed does not support the argument that there is not a viable lending business available. CSH was the target of a CFPB action in November 2013. They discovered the company to have violated regulations in the state of Ohio under a subsidiary they acquired to properly file and review loan documentation in addition to overcharging military personnel. The most damning item is the fact they destroyed evidence prior to the investigation in the Enova entity. The pending management came in after the destruction was ordered and the current CEO is stepping down after the spin off. CSH was ordered repayment to consumers and charged fines totaling $19 million or less an average quarter’s net income. There was similar litigation from Ohio on these issues. Finally, there is a pending settlement for loans that violated lending laws in Georgia, which is estimated by the company at $18 million with a maximum estimated damages of $36 million. These appear to be divisions that were acquired as part of their expansion programs, and not endemic of the company’s overall operating program. Additionally, now that they have been investigated, one can assume this to be the extent of federal investigations for the time being. As they acquire additional chains as a growth strategy; however, potential future litigation should be considered with similar settlement amounts.

Additionally, CSH has taken steps to reduce its dependence on short term loan revenues, but is now deciding to take that one step further by spinning off the online loan business. This will have CSH be a pawn shop with some loans given at their store locations, along with check cashing and other bank like services.

The projections for normalized earnings in the next year that would reduce all the pawn shop loan business by 70% and minimal growth in the pawn operations, which leaves EBIT of 3.18/s and NI of 1.61/s assuming average expenses and 600 for foreign currency. This new pawn show business would tepidly earn EBIT/(NWC+FA) of 10.9%, ROA of 3.3%, and ROE of 4.7%. There is still room for controlled growth through their acquisition strategy and management’s comments of focus on the retail side of the business through inventory turnover, margins and same store sales would leave some room for improvement, which is ignored in this analysis. The lower returns might justify a 17 multiple of P/E (a discount to comparable FCFS, who is 19.89), making the stock worth $27.37. This is lower than the only comparable found of First Cash Financial Services (FCFS), which operates in the US and Mexico, like CSH.

The remaining speculative, high growth, high return business of online loans, now called Enova International, valued at 16.95 based on above. The business can quickly move locations to best maximize profits due to its online presence and have already started experimenting with non-English speaking countries. Run by a CEO that sold optionsXpress to Charles Schwab, this company has focused on installment loans and lines of credit to grow their business. Taking the same 70% hit to short term loans, but allowing the other loans to grow at current rates would leave a business with a projected EBIT/(NWC+FA) of 37.7%, ROA of 9.2% and ROE of 54.6%. Assuming this stellar performance deserves a P/E of 20x, then the value of Enova at $40.52. This combined give a current value of $67.89 and a gain from current value of over 50%. Please do your own analysis and review for the suitability of these projections.

The parent company is Kimberly-Clark Corporation (KMB) has four divisions it operates. Personal Care, Consumer Tissue, K-C Professional and Health Care divisions all involve cleanliness products. Personal Care is the leading division in revenues with brands Huggies and Kotex. Consumer Tissue is known for Kleenex and Scott. K-C Professional is clean products for the workplace and driven also by the Kleenex and Scott brands. The final division is being spun off, Health Care. It is divided into Surgical and Infection Prevention and Medical Devices. It is sold under the Kimberly-Clark name, which is now being changed to Halyard Health.

As you can see in the revenue growth over the last several years that there has been little growth as this is a fully mature industry with little innovation without competition stealing the advantages.  However, you can see that it has been able to maintain operating margins. The company then partakes in share buy backs and dividends with the profits obtained. This becomes less of a stock and more like a bond that’s payment is tied to GDP. The spin-off will be large enough to be accessed by all large investment institutions. The multiples of medical companies is not materially different from personal product multiples. The only growth opportunities that are available are demographic based for the main company. There is growth from baby boomers and their echo both needing diapers for different reasons. This would only impact the US and it’s hard to determine the magnitude of diapers within the Personal Care segment. Additionally, this impact is a few years from maturing. There appears no near term investment opportunity.

Let’s start with a little history. The Tribune Company started in 1847 and moved into broadcast in 1924. It went public in 1984. It grew in both of these industries with multiple mergers and disposals through the years. In 2007, Sam Zell purchased the company through a leveraged buyout and started selling assets. By 2008, they filed bankruptcy and the ownership transferred to employees and the largest debt holder: Oaktree Capital Management, JP Morgan Chase, and Angelo, Gordon & Co. Although considered privately held, there are A and B class shares trading on the OTC markets. The Tribune is once again restructuring. This time they are getting rid of the newspaper business. This spin off will be called Tribune Publishing (TPUB) and trade on the NYSE. Its big papers will be the LA Times and Chicago Tribune. It will issue debt and kick it back to the parent. It will not own the real estate it operates from, but will lease that from the parent company. It will only have an affiliate status for its job classifieds run with careerbuilder.com, which will remain owned by the parent.

For the financial information, the amounts are shown per share using the shares expected to be outstanding post distribution. This will hopefully help the reader link the importance of the financial information to the value per share. Please share your thoughts on this experiment below.It is clear the owners consider this to be bad assets and are removing it from their prime offering, which will be a broadcasting company with cash and real estate. It is assumed by the primary investors being experts in distressed investment that the selling of the parent is where they will most likely make a majority of their return. As such, there is a chance they will not try to manipulate the price any greater than they already have to the market by slowly selling their shares and therefore the share price will be artificially low.

As you can see the earnings for the last few years have been much higher than the years prior, this was driven from cost cutting as revenues were in decline. This appears to be a temporary measure to ensure a good issuance as costs have already started to increase per the quarterly information for March. Additionally, as the new spin off begins to work out of the transition service agreement, which ends two year after the spinoff date. Finally, the increased debt load will weigh down the company with additional payments not currently recognized. If potential investors realize this in addition to the current investors selling quickly and the disregard for the dying industry known as newspapers, then the price might fall excessively.

For comparables the New York Times and Gannet were selected. As the New York Times has a higher brand premium, which can be seen in the fact a majority of its revenue is from subscriptions rather than advertising, it is can be estimated to trade at a discount to the New York Times, but comparable to Gannet, whose biggest name asset is USA Today. As you can see they are currently trying to suggest a price around $60, which the fair value market is closer to $30 and could allow for shorting. If a change in strategy does not occur in the next few years, then the company will struggle to meet its obligations as the revenues continue to decline. For this reason, the stock option idea of theta is needed in your considerations of a margin of safety. A heavy margin is needed, where a price below $10, depending on your risk tolerance and investment objectives, should be considered. The record date is July 28^th and distribution date is August 4^th. Keep an eye on the share price to see what happens.

Kimball International is both a manufacturer and seller of furniture in addition to being an electronic parts assembler. Just to keep things confusing, it was originally the world’s largest piano and organ manufacturer with electric organs leading to electronic assembly. It started in 1857 and went public in 1975. The many pivots of this company over time has left the company with the two distinct products that are being split now.  While disconnected business elements in a small market capitalization business held a lot of promise, there were a number of items that prevent the profit of this separation. Instead of doing a full analysis for Kimball International (KBALB) and the spin off Kimball Electronics, the decision was made to show how this spin off received three strikes out.

Both entities provide consumer discretionary products, which naturally leads itself to cyclical sales and income amounts. It is undetermined if the furniture segment will regain life or will remained depressed due to the competition of La-Z-Boy LZB) and Ethan Allen Interiors (ETH). The electronics segment shows an upswing, but to prior highs. It appears to be a barrier they have to grow beyond this point and is well above the average, which would be a strike as both businesses do not have growth projected and have a long history of losses.

As a majority of the profit is from the electronics segment, the second strike comes from the disclosure that the largest customer, Johnson Controls, Inc. (JCI) is moving their electronics assembly in house in the fourth quarter of this year, which would result in an approximate 17% loss in revenues.

The final strike was more of a business model problem. Kimball Electronics moved their work overseas, but their management is still US based. Therefore they will still have higher overhead than their oversea competitors. Without a product in a commoditized services in a cyclical industry, it will be a difficult to sustain any growth. The furniture manufacturer faces a similar uphill battle as they have also manufactured abroad, but have the added value charges of shipping those items to the US. It is hard to see how these businesses will turn around soon and management has made no indications of a plan other than spinning off the electronics segment.

You probably know ADP as the payroll people, especially if you live in the US. You probably have some experience with them and might have even seen their jobs numbers. If you checked out their website you would see the following, “ADP services 620,000 organizations in more than 125 countries, including more than 90 FORTUNE 100 companies use at least one of ADP’s services.” It’s clearly a large, mature company that processes payroll and performs HR type services. For the most part you are right. That’s their bread and butter. The interesting part is that they also have side businesses that they grow to become large institutions and then either sell or spin off. The reason they emphasize the dealerships is because 16% of their revenues come from dealer services, which include dealer specific ERP systems and marketing services. That is the business they are currently planning to spin off. This isn’t a new tactic for ADP. In 2007 they spun off their financial services division, which is now Broadridge Financial Solutions, Inc. (BR) and sold their travel services. Based on the incentive program, the desire to spin off these entities appears to be less a focus on the core competency than a desire to improve margins. For that reason, the expectation is the spin off will occur by next June 30th and potentially in the next few months.

ADP operates three disclosed segments: Employer Services, Professional Employer Services (PEO), and Dealer Services. Employer Services is what ADP is known for. It also expanded related services to smaller entities as PEO. Dealer Services, thanks to the new disclosures, can be broken down into three segments: Automotive Retail Solutions North America, Automotive Retail Solutions International, and Digital Marketing Solutions. To analyze these entities, the most recent SEC filings were used in each case. That means the last year a record was reported, which is three years after the date for segment income, was used with the thought that information would account for acquisitions, reorganizations, error, etc. Therefore the later amounts should be the most accurate information available. Additionally, the spin off has not yet  been reconciled to the segment data previously provided. To adjust amounts for agreement with the previous audited submission, the Other category was adjusted accordingly.

As a whole the company’s revenue grew at approximately 7% a year. You can see the downturn in the economy and jobs in 2008 and 2009, which makes sense as employers lay off people and stop hiring. This was partially offset by the growth in small to medium size business offering in PEO and to a lesser degree Dealer Services growth. Dealer Services had a severe drop in growth during the economic downturn. At first glance, Dealer Services appears that 2011 started a higher growth level, but per their disclosures it would been only 3% as opposed to 21% reported if not for acquisitions. The primary acquisition was Cobalt, who is the base of their Digital Marketing Solutions (Digital) segment. If you look at the overall operating margin, you see a solid 17% margin with higher averages. The margin requirements for the executive incentive program is pretty clear here in keeping margins high. The segment raising margins is the Employer Services segment at 27% margin for both the prior year and average. PEO has lower margins as one would expect to win smaller businesses, which have less money to use. PEO has consistently maintained 10% margins. Dealer Services currently has the same margins as ADP as a whole. It has maintained margins at that level even through the economic downturn. You will notice the overall margin has decreased as PEO and Dealer Services gained in percentage contribution to operating margin, which is being asserted as part of why management wants to spinoff Dealer Services. The split between Dealer Services from ADP if looked at from an overall perspective will have no impact on margins, but as you can see from the split out values, margins will increase as Employer Services will be a greater percentage of operating profit.

Within Dealer Services, we have a thin slice of financial data with only three years of data. This is most likely strategically selected as to not report prior to the acquisition of Cobalt as the large driver of revenue growth is Digital at 18% growth. This growth is followed by North America at 8% growth and maintaining a 25% operating margin. The smaller segments have lower operating margins. International increased in margins to 10% and Digital increased margins to 9%. Dealer Services will most likely see margins decrease as Digital continued growth puts downward pressure on the company’s margins.

Management of Dealer Services is filled with longtime ADP employees. The new CEO has been leading the ADP Dealer Services segment for a number of years and has been an ADP employee since 1975. With the exception of John Holt of Digital, who came with the Cobalt acquisition, the management team is filled with life long ADP personnel. This will most likely result in Dealer Services operating in a similar fashion as ADP. There will likely be a focus on margin, which should improve with the new focus. However, Digital will most likely have downward pressure over the long term if proprietary marketing strategies do not develop as there are few natural barriers to entry. ADP has a history of regular strategic acquisitions to contribute to overall growth rate. This should also be expected as Dealer Services, who was behind the success of the Cobalt acquisition. This could lead to an increase in growth outside of projections from historical data.

There is one area, however, that Dealer Services might change from ADP prior practices that will lead to improved economics of the company. Per ADP’s financial statements, 85% of all revenues originated in North America. This is partially due to the regulatory environment, where the United States and Canada have complex compliance structures for employers. Not all nations have payroll tax and many that do have a simplistic system that does not require outsourcing. This has resulted in a company ignoring international options. This is shown in Andrew Dean’s goals, who is head of International. In the prior year, one of his goals was to create a strategy for Russia and Automaster. He was not rewarded for execution, but to create a plan. The focus has appeared to be on Europe, but only lightly. They claim to have brought in $315 million from 100 countries, which makes it appear to be a discombobulated operation of many tiny businesses, which would require a dramatic increase in compliance issues. A sign this focus will change is based on the disclosure of “Our Market Opportunity,” which lists China and Japan as major opportunities. This could result in International becoming greater or equal to North America operations with the expectation based on the above for similar margins. This is another potential option for growth and higher margins in the new business.

Looking at each of the components competitors for valuation creates interesting results. The closest competitor to Dealer Services is Dealertrack Technologies, Inc. (TRAK). According to Yahoo Finance, Dealertrack has negative income and cash flow from operations. As of July 3, 2014 it was trading at 4.61 times sales and it’s EV/EBITDA was 63.87. The valuation seem insane, but auto sales have been strong and this is the only public company selling marketing and ERP systems to auto dealers. Dealer Services has an estimated 40% of the dealer ERP market with Reynolds and Reynolds having the other 40%. This shows that Dealer Services might sell into a hot market and have valuations that can’t be supported by a discounted cash flow, liquidation or acquisition value. For our valuations purposes, let’s add debt for the spin off. ADP has estimated $700 million to return to itself in the form of a dividend. Let’s estimate that they will issue $900 million in debt to leave Dealer Services with strong working capital. We will have North America with a 7% revenue growth and 26% margin. International will grow at 10% and a 15% margin. Finally, Digital will grow at 20% and a 10% margin. This is approximately $425 million in operating income, which is approximately EBIT. Assuming a one for one share swap and a 10xEV/EBIT then you have 8.82 a share. If you take a ten year bond, and a 20 PE, then you get $8.17. As this is the largest public auto dealer with strong margins, this appears to be relatively conservative. For future calculations, we will estimate it at $8.50.

PEO has several competitors. For comparison, Inspirity, Inc. (NSP), Paychex (PAYX), and TriNet Group, Inc. (TNET) were selected using the trailing twelve months.

TriNet Group is closest in size to PEO and Paychex is closest in terms of services and with a focus of higher margins. TriNet is claiming to increased profits and the future P/E is 20. Using a 25 P/E PEO is valued at $6.71.

Using similar pricing and using the $700M for a stock buyback at current prices, ADP’s remaining services is 73.25. This means the total value is 88.16. This is slightly lower than the current value as of July 3, 2014 and contains the option for stronger international growth than predicted, increased P/E for stronger margins in ADP, and selling into a hot market for Dealer Services. This creates a free option for the upside.