Two Spin-Offs, and Which Ones I kept
S&P Global's Mobility and Honeywell splits closed this month. Which ones I'm holding, buying, and selling.
The S&P Global Spin-Off
S&P Global completed the spin-off of its Mobility segment on July 1. The new company is Mobility Global, and it trades on the NYSE under MBGL.
If you owned SPGI at the close on June 15, you received one share of MBGL for every share of SPGI you held—one for one. Fractional shares were sold and paid out in cash.
We didn’t sell anything. We still own the same S&P Global, and we now hold Mobility Global as well, trading around $20 a share.
The Business
Mobility Global is mostly Carfax.
Carfax is about 65% of revenue and 75% of adjusted EBITDA. The rest is a B2B segment selling data and software to automakers and dealers.
Carfax sells vehicle history reports. It pulls data from more than 177,000 sources—DMVs, police departments, auction houses, service shops, insurers—and holds more than 38 billion records. It took decades to build this database, and a new entrant can’t simply replicate that data with more funding.
Adjusted EBITDA margins are near 40%, and subscription revenue is more than 80% of the total. Because the business is tied to the used-car and dealer market, it holds up whether or not new cars are selling. Roughly 80% of revenue is recurring and subscription-based.
Why the Stock is Cheap
MBGL is a roughly $6 billion company.
That’s too small for the S&P 500, so funds that track the index can’t hold it. It also no longer belongs in the financial sector where S&P Global sits, so funds built around financial-sector benchmarks can’t hold it either. Both groups have to sell, regardless of what they think of the company, though selling from S&P 500 tracking funds is the bigger pressure of the two.
This is mechanical selling, and it explains most of the recent price decline post-spin-off.
My fair value estimate is around $28 per share, and some sell-side reports I’ve seen have target prices in the mid-$20s.
Risks
I see three main risks to Mobility’s business: one near-term and two longer-term.
The immediate risk is the balance sheet.
Mobility Global went public with about $2 billion of debt. That’s 2.8 times gross leverage against management’s 2.5 times target. The business generates enough cash to carry it, but it’s a meaningful debt load for a new standalone company, and it’s above where management wants to be.
The counterpoint is that S&P Global didn’t saddle the company with so much debt that it threatens its status as a going concern. It also means Mobility’s equity is a small sliver of its capital structure. When enterprise value improves, it can produce outsized percentage gains in equity value. This is essentially a leveraged recap play through a spin-off.
The longer-term risk is the concentration in Carfax. Experian’s AutoCheck is cheaper, and Carfax’s move into listing marketplaces gives Experian a bigger opening to compete there.
The even longer-term risk is self-driving cars and slowing population growth, shrinking the used-car market.
Why I’m Holding MBGL
The price is below most target prices, and—more importantly—below my estimate of fair value. It got cheap for reasons that don’t reflect the business.
While the business is not as durable or impregnable as its parent, S&P Global, it is still a dominant player with recurring, high-margin revenue that’s protected from cyclical car sales. It has a tangible data moat and intangible brand awareness.
I’m not adding yet. I want a couple of quarters of standalone reporting before I decide what I want to do, but it’s a good business trading at a cheap price.
The Honeywell Split
Honeywell completed the split of its aerospace business on June 29. The old company is now two: Honeywell Technologies (HON), the automation business, and Honeywell Aerospace (HONA).
For every two Honeywell shares you held on June 15, you received one share of Honeywell Aerospace.
Honeywell then ran a 1-for-2 reverse split on the shares you kept, so your HON count halved, and the price roughly doubled. Net of both steps: every two old Honeywell shares are now one Honeywell Technologies share plus one Honeywell Aerospace share. Fractional shares were paid out in cash.
This finishes the three-way breakup that started with Solstice Advanced Materials last October.
The Businesses
Honeywell Aerospace
Honeywell Aerospace (HONA) sells mission-critical systems that aircraft manufacturers can’t build planes without. The cleanest example—and its most important franchise—is the Auxiliary Power Unit (APU).
The APU is roughly a $1 million part on a $100 million jet. Replacing it would take years and require a new FAA certification. Once an APU is designed into a plane, switching becomes extremely costly.
As mentioned above, each APU is deeply integrated and interfaces with the flight management systems, environmental control systems, and engine starting mechanisms. Switching to a different APU manufacturer would require extensive re-engineering of these systems for the aircraft manufacturer.
Then they would need to run extensive and expensive tests on the new APU system. Every aircraft must obtain a Type Certificate from the FAA demonstrating that the aircraft design meets all safety standards. The APU is part of that design.
Switching from a Honeywell APU to a new APU requires major modifications to the Type Certificate and a new round of testing, documentation, and regulatory approval. This process could take years and cost millions of dollars.
Then on top of this sits a razor-and-razor blade aftermarket: sell the equipment once, service it for decades.
Life-limited parts like the APU must be replaced after a certain number of cycles, flights, hours, or years, and it’s almost impossible to source them from anyone other than the OEM.
The FAA requires that any replacement part on a certified aircraft come from the OEM or have its own Parts Manufacturer Approval (PMA). To obtain a PMA, a company must demonstrate that the part is identical to or better than the original. This requires exhaustive testing to prove compatibility and integration with the rest of the system—a process that takes significant time and money.
“Generic” aircraft replacement part companies like Heico tend to reverse engineer the parts they compete against, which is far easier for simpler components. Life Limited Parts are usually the most technically sophisticated components and rely on proprietary information that OEMs won’t share.
The business earns around 30% on invested capital, has a disciplined capital-allocation record, and has the kind of moat this newsletter exists to own.
It’s trading around $237 as I write this, versus my updated estimate of fair value of $280 per share.
One more point worth noting: HONA is joining the S&P 500 and the S&P 100, which makes index funds forced buyers.
Honeywell Technologies
Honeywell Technologies (HON) is the automation company left behind. It covers building automation, process technology, and industrial automation. These are fine businesses, but this is the half whose uneven results dragged down the company for years, and it carries the goodwill from a long, mixed acquisition history.
It trades around $224 as I write this, which is above my updated estimate of fair value of $160 per share.