This Spin Off May Be A `Screaming Buy'Jeffrey M. Laderman
Corporate spin-offs are the orphans of Wall Street. Take GFC Financial, recently spun off to stockholders of parent Dial. The new stock, which trades on the Big Board, climbed as high as 23 but has since fallen to 19 3/8. Much of the selling has come from index funds that must own Dial because it is part of the Standard & Poor's 500 but can't own GFC because it's not part of the index. Even the announcement of strong first-quarter profits, up 42%, failed to stem the selling pressure.
But to some market pros, the indiscriminate dumping has created a tempting investment opportunity. Part of the market's reticence over GFC stock is wariness about finance companies. "The market is unfairly punishing GFC for the industry that it's in," says Scott L. Greiper of The Spinoff Report. "The stock is a screaming buy."
Greiper says GFC is a different animal from most large finance companies. The bulk of its business comes from making secured loans of $2 million to $30 million to "middle-market" companies. Asset quality is high. Samuel L. Eichenfield, GFC's chairman and CEO, says that troubled assets are below 4% and that loan losses are under 0.3%. Prior to the spin-off, Dial took write-downs to clean up the books and give the new company a fresh start.
GROWTH POTENTIAL. Eichenfield says the spin-off opens up new opportunities. Under Dial, a consumer-products company, growth was constrained to about 8% a year because it had to pay about half its profits to the parent. Now GFC has more flexibility. It can use its own stock, for instance, to make acquisitions. Eichenfield wants to acquire a finance company that specializes in "working-capital" loans--money to finance inventory and receivables. That would allow GFC to offer a wider range of services.
Eichenfield says the company may allow its Verex Assurance unit--an insurer of residential mortgages--to start writing new policies again. That unit has been contracting for several years when Dial halted new business after a spate of losses. GFC also inherited from Dial a London-based European finance company, which may be sold. That could free up about $100 million to reinvest at home.
Analyst Jay R. Leopold of Legg Mason Wood Walker forecasts profits of $2.40 a share for 1992 and $2.80 for 1993. The dividend, which is expected to be set at 56 a share, would provide a 3% yield. By Leopold's estimates, GFC should climb into the low 30s in the next 12 months.