The Spinoff Report Card series helps you identify the best spinoff investments by grading a spinoff on four criteria explained in "Why Spinoffs Beat the Market" and "How to Pick the Best Spinoffs."
Can you explain how a resistor works? Or what a resistor is? Don't worry -- you needn't understand the inner workings of electric circuits to grasp the investment opportunity opened up by the recent spinoff of Vishay Precision Group (NYSE: VPG). That's because the transaction itself -- not VPG's resistor business -- has created the opportunity.
1. Do institutions want to own the spin-off? Grade: A
Absolutely not. Remember, institutional selling can create lower prices for us, so institutional repulsion is a beautiful thing here.
With a market cap of just $211 million, VPG is tiny. Most institutional investors' fund mandates forbid them to own something that small. If they come into shares passively, as in through a spinoff, they are most likely to sell. Even if they aren't required to sell, they probably would anyway. No matter how much stock they have in a $211 million company, it just isn't enough to move the needle on a multibillion-dollar portfolio, and therefore it's not worth their time to analyze or follow.
VPG is also small in relative terms; it accounts for around 10% of the pre-spinoff company. Institutions were likely investing in the business of Vishay Intertechnology (NYSE: VSH), VPG's parent, rather than Vishay Precision Group's. Vishay Intertechnology is a one-stop shop for basic parts for electronics makers; Vishay Precision Group makes resistors and weighing systems -- for example, to allow logging trucks to self-weigh their loads. These are different businesses. Institutional investors were likely happy to be able to shed their investment in the VPG "side business."
All together, institutions aren't going to want to touch this stock. VPG gets an A here.
2. Do insiders want to own the spin-off? Grade: B
You betcha. Under the terms of the spinoff, the CEO received an $800,000 slug of stock as soon as the deal was completed. The CFO and CTO (Chief Technology Officer) received an additional $100,000 each.
Furthermore, the founder of the original Vishay Interechnology Company is keeping more than a million shares, accounting for more than 8% of the company. The catch here is that most of that is in Class B shares, which have 10 times the voting power of normal shares. With 45% of the voting power, the founder does not, however, have total control. While the dual-class structure is a slight ding to VPG, the spinoff structure designed to land shares on insiders' laps makes me comfortable that they see opportunity here. Insiders get a B.
3. Does management have incentives to make the spinoff succeed? Grade: B-
Incentives are good, but they could be better. CEO Ziv Shoshani receives a $420,000 salary, which is by no means excessive. And he gets an annual slug of stock worth the same amount, which continuously reinforces our interests. Ziv can also take home up to twice his salary in cash depending on operating margins and EBITDA performance -- appropriate goals, but we'd rather see his compensation come in the form of stock or options.
On the negative side, Ziv pocketed a cool $1 million in cash for simply making sure the spinoff didn't flop on day one.
While compensation does incentivize management in our interests, we'd rather see more of the pay in equity. Management gets a B-.
4. Does the spin-off transaction expose a "special opportunity"? Grade: A
The timing of the VPG spinoff transaction has created a special opportunity. The company wasn't officially spun off until July 6, but its quarterly financials reflect the financial situation as of July 3. And a lot happened in those three intervening days.
VPG paid off just more than $19 million it owed to Vishay Intertechnology, and then Vishay Intertechnology turned around and gave VPG nearly the same amount back as part of a cash-infusion requirement in the spinoff agreement. Also, Vishay Intertechnology offloaded about $10 million in debt onto VPG -- common behavior in spinoffs. The net effect of all this is that VPG ended up with about the same amount of cash, but 33% less debt than you would think if you simply looked at the balance sheet. This complexity confuses most investors, if not outright deterring them from considering an investment in VPG.
An additional opportunity comes in VPG's business. Post-spinoff, VPG is a niche player, producing specialized electronic components and systems designed for weighing trucks or measuring stress in industrial processes. Though basic electronic components such as resistors are normally commodity products, VPG's specialized type of resistors are not. As a result, while VPG faces competition from firms including Measurement Specialties (Nasdaq: MEAS), Mettler-Toledo International (NYSE: MTD), and MTS Systems (Nasdaq: MTSC), these firms do not produce near-identical products as in commoditized markets. Rather, competition is much more dependent on product quality and customized service to specific clients.
Overall spinoff grade: B+
Vishay Precision Group has several features characteristic of the best spinoff situations. It is a stock that institutions are loath to own, but insiders are thrilled to. We'd rather not have the dual-class stock structure, and management could be incentivized more in our favor, but the stock does offer a special opportunity in the inaccuracy of the current financial statements and its niche business model. Overall, this spinoff gets a B+ on its report card.
