ITT Spin-Off Could Create Buying Opportunity

By Erich Sauer:

On October 31, 2011, ITT Corporation (ITT) will complete a spinoff that will separate the conglomerate into three standalone businesses – a defense company known as Exelis (XLS), a water company known as Xylem (XYL), and “new ITT,” an engineering company involved in aerospace, transportation, energy, and industrial applications. The spinoff will be “one-for-one” and then new ITT will undergo a one-for-two reverse split. For example, if you held ten shares of old ITT, you will end up with 10 shares of Exelis, 10 of Xylem, and 5 of new ITT.

Spinoffs can be beneficial to shareholders for many reasons. The stock prices of conglomerate businesses are often held down by a “conglomerate discount” which suppresses the P/E ratio. Trading as separate companies can allow the market to evaluate a spun-off business on its own merits, and in many cases will lead to increased P/Es over time.

Management can also


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