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Tickers in this Article: ITT, SI, ITW, RTN, NOC
In January, industrial conglomerate ITT Corporation (NYSE:ITT) announced plans to break into three separate businesses. Management's hope is that this will unlock value in letting investors better understand the operating strength and potential of what are now three operating units. Shareholders are also hoping that rivals take notice and acquire the businesses at hefty premiums, once the stocks trade on their own.
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Fourth-Quarter Recap
ITT's sales rose 8% to $3 billion. The defense segment accounted for 53.9% of total sales and reported modest 5% growth as strong trends in electronic defense systems was offset by declines in information and geospatial systems, the last of which sells sensors for air and space defense uses. The fluid technology unit made up 35.2% of sales and jumped 16% on strong sales for waste water and industrial pumps, valves and control systems. The final segment is motion and flow, which accounted for the rest of sales and posted no growth. Examples of products in this unit include brake pads for railcars and automobiles as well as flows and pumps to industrial clients.

Cost controls helped boost operating income 27.8% to $363 million. Slower growth in income tax expenses helped push net income up 35.2% to $269 million, or $1.44 per diluted share.

Year-End Review and Outlook
2010 will likely mark ITT's last as a conglomerate. Total sales increased a modest 3% to $11 billion as a decline in defense sales were offset by positive growth in the other two divisions. Net income jumped 23.9% to $798 million, or $4.30 per diluted share. Asset disposals helped free cash flows improve 15.5% to $1.2 billion, or approximately $6.28 per diluted share.

For 2011, pre break-up analyst projections call for 4.4% sales growth to $11.5 billion and $4.76 per share in earnings.

A Look at the Split
ITT shares have jumped more than 14% since the break-up announcement was made. This now discounts much of the upside potential that the three soon-to-be independent firms have on their own, but the combined firm still trades at less than 10-times trailing free cash flow levels.

The new firms could be takeover targets once the breakup occurs. Defense firms including Raytheon (NYSE:RTN) and Northrop Grumman (NYSE:NOC) could look to acquire market share and cut costs as defense spending levels are likely to fall or remain stagnant given government budget pressures. Industrial conglomerates including Siemens (NYSE:SI) or Illinois Tool Works (NYSE:ITW) could find the industrial segments appealing.

Bottom Line
Overall, spinoffs generally perform well as independent firms because management teams can focus on their own operations without the distractions that go with being part of a conglomerate. Capital can be allocated more efficiently, as can organic growth and acquisition activities. In other words, there is upside potential if the three units remain independent or are bought out by larger rivals. (For related reading, also take a look at Conglomerates: Cash Cows Or Corporate Chaos?)

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