“Is McDonald’s Giving Up on Growth?”
That was the title of a research report back in early 2006.
McDonald’s had just spun off it’s relatively small (500 locations) Chipotle Mexican Grill (CMG) division into a stand-alone company.
The conclusion to the report was McDonald’s was giving up on growth.
Almost a decade later, I must say it all played out even more drastically than I could have expected at the time.
McDonald’s is having it’s toughest run in years. Hopes of a turnaround aren’t high either. CNBC reports, “McDonald’s franchisees have never been this depressed.”
Meanwhile, Chipotle has expanded steadily to more than 1700 locations. And its shares are up 1,517% since it first hit the public markets in 2006.
Now, we’re looking at another similar situation.
A large and stagnant parent company is spinning off one of its best-growing segments which is itself facing years of massive growth ahead.
Will it match the fantastic results of Chipotle?
Over the weekend my colleague Stephen Oakes went over with you the tremendous growth opportunity in mobile payments that’s just getting started.
All signs say he’s onto the right trend at the right time like he has been so many times over the years. His top online payments pick is facing potential gains of up to 100% and that’s not the first triple-digit winner he’s found either.
But that’s just one of the options in this mobile payments processing.
A more conservative play -- and one which will surely play a big role in mobile payments -- is PayPal and it’s looking like a similar situation to what McDonald’s/Chipotle was a decade ago.
It’s been a long time coming too.
Ebay (EBAY) bought PayPal back at the bottom of the post-tech bubble bottom in 2002 for a $1.5 billion.
The two have grown together over the years. But online auction growth potential is nothing compared to mobile payments growth potential.
So, as of Friday, PayPal has been fully spun off from Ebay.
PayPal has been trading under the ticker symbol PYPLV for a few weeks in anticipation of this transaction. But it’s now complete and PayPal can really start taking advantage of it’s position.
Right now PayPal has 165 million active accounts around the world.
Emerging competitors in mobile payments like Apple Pay and Google Wallet are nowhere close.
For Apple, pyments.com has estimated there are 2.14 million iPhone users who gave Apple Pay a try.
For Google, The Guardian has estimated the Google Wallet app has been downloaded by less than 20 million users and only actually used by less than 17 million.
Both of those are nothing compared to PayPal’s user base.
Consider these limiting factors.
There are only 89 million Android devices which can use the Google Wallet app.
So even if Google reaches 100% penetration, it will still only be half the size of Paypal.
That’s how big a lead PayPal has in mobile payments. But it’s just half the story.
Great Company, Better Stock
All investors learn pretty early on a great company does not always make a great investment.
History says odds are PayPal may just be both of them.
You see, spin-offs are some of the best stocks to buy.
They’re especially good when a mature, lumbering parent company is spinning off a rapidly growing segment.
Chipotle is just one example of this. We’ve watched it time and time again over the years.
Take Coach (COH). Back in 2000, Sara Lee spun-off this luxury goods division.
After the spin-off, Coach shares hit a split-adjusted low of $2.00 that year. Today it’s $31 a share.
AT&T is probably one of the best examples of high-growth spin-offs.
It spun off Lucent Technologies, it’s internal telecom hardware business, in 1996 because AT&T was actually preventing Lucent from reaching its full potential.
As a part of AT&T, Lucent could not sell its products to any of AT&T’s competitors. It was too limiting.
That all changed after the spin-off and Lucent soared during the tech bubble.
Lucent even had it’s own spin-offs too. When the company was getting hammered for recognizing sales from customers who were never going to be able to pay for them, Lucent spun out two companies: Agere Systems and Avaya Inc.
If you know the history of growth-focused spin-offs, you shouldn’t be surprised by what happened next.
Today Agere is part of the global data boom giant we talked about last week, Avago Technologies (AVGO).
Avaya was taken private in 2007 and now provides telecom solutions to more than 450 of the Fortune 500 companies.
Lucent, meanwhile, merged with Alcatel and is still trading at the same price it was in 2009.
Those are just a few of the really big spin-off successes. There are many, many more which make spin-offs such great buys.
A Simple Way to Find Great Stocks
In the end, we’re going to withhold judgement on PayPal for right now.
But if you’re looking for great stocks to buy, spin-offs are a great place to start.
According to a 1993 Penn State study which analyzed the spin-offs over 25 years, spin-offs beat the S&P 500 by an average of 10% per year in the first three years after being spun off.
Another study by McKinsey confirms the success of spin-offs. This study covered all the spin-offs with at least $200 million in revenues and found they returned an average of 27% per year compared to 17% per year for the S&P 500.