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Tickers in this Article: ITT, XLS, XYL, MANT, ITW, AWK
Back in January, industrial conglomerate ITT Corp. (NYSE:ITT) announced plans to break itself into three separate, publicly-traded companies. The move, which was billed as helping the units "emerge as three strong and focused standalone companies," is finally set to take place on Halloween. On Friday, the company reported its last quarter as a combined entity and lent further insight into what each unit will look like when they start to trade independently on Monday. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Third Quarter Recap
Given ITT's imminent split, a review of each separate unit will provide the clearest insight on what each unit will look like on a standalone basis. The defense segment is set to be named ITT Exelis (NYSE:XLS) and reported third quarter sales growth of 12% to $1.5 billion. Management cited higher service revenue from Middle East business as well as strong trends in the mission and information systems businesses. Operating income was flat at $178 million but still represented a decent margin of close to 12%.

The fluid technology unit saw sales jump 17% to $1.1 billion on a healthy mix of acquisitions and organic growth. This division will soon be called Xylem (NYSE:XYL) and will be referred to as a water company that will combine ITTs residential & commercial water, flow control and water & wastewater businesses. Operating profits jumped 25% to $144 million for an impressive margin in excess of 13%. Most of the motion and flow control business will retain the ITT name and saw sales advance 6% to $386 million. Operating income in this unit grew 7% to $49 million for a profit margin also close to 13%.

Total company sales reached $3 billion, operating income was $152 million and net income came in at $78 million, or 42 cents per diluted share. Comparability from the third quarter last year is limited given the charges taken to break ITT up.

Outlook
Analysts project total full-year company sales growth of 5.5%, total sales of almost $12 billion, and earnings of $4.76 per share.

The Bottom Line
A down stock market and potential uncertainty surrounding the spinoff have pushed ITT stock down more than 30% off its highs and toward its low point over the past year. The forward P/E is now below 10 and trailing free cash flow multiple is closer to 9. This represents a very reasonable entry point for a collection of businesses that have been able to grow sales at more than 5% annually and profits close to 18% annually over the past five years. (For more, see The P/E Ratio: A Good Market-Timing Indicator.)

The separation of the three divisions into their own companies adds further upside potential. Each unit should continue a path of modest growth but should also be able to capitalize on increasing growth as independent entities. Furthermore, there is buyout potential from the pure plays in each industry. For example, acquisition-minded ManTech (Nasdaq:MANT) might be interested in snapping up ITT Exelis, American Water Works (NYSE:AWK) could acquire Xylem, or Illinois Tool Works (NYSE:ITW) could potentially fold parent ITT into its diversified industrial products model.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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