Absolute Return is signaling that Ackman is looking for more capital from the public markets. Stable Capital.  The sum floated out there is $3 billion.  Since Ackman has to always keep some liquidity for redemptions or to add to existing positions, more capital would give this activist investor more powder to go after larger fish.

Call it activist investing, corporate raiding, turnaround investing, or value investing… This strategy offers a little for almost everyone.  And if Ackman gets his way he is going to be able to be a lot more vocal.

Our own take on Best Buy Co. Inc. (NYSE: BBY) is that there is value here whether or not Ackman is in it or not.  This one went up on Wednesday when the broader market was a sea of red.  When we called it as being value after its earnings, it would have just been assumed that the caveat “unless the stock market tanks” could have been included.  Still, Best Buy stock was up on a day when the DJIA was down close to 200 points.  Imagine if the market had risen.

Fortune Brands Inc. (NYSE: FO) is another one which has buckled to pressure from Ackman.  He even once upon a time noted that Citigroup Inc. (NYSE: C) has a value far higher around the time it was thought as one which could still double.

Whether or not Ackman gets a new fund or conducts a public offering of some form would probably come with some caveats.  Regardless, it would give this activist investor more capital to make either a broader range of targets or one that can better hone in on larger targets and still be able to have a voice.

An activist investor, or a group of activist investors, can all go after any company of any size.  The problem is that they can’t have any power other than for one day or just a few days a year when shareholder meetings occur and when other presentations are made.  Many companies are either tightly controlled or they have a management team that doesn’t buckle to outside pressure.  A few billion more would give Ackman a louder voice at larger companies.

By the way, if Ackman is successful in this effort then you might as well expect that other activist investors will go to the public to raise capital as well.

JON C. OGG

Now we have a break-up into two happening from Marathon Oil Corporation (NYSE: MRO).  Marathon is far from a conglomerate, but its split into two for its exploration activities and its refining activities follows the same path as ITT.  Fortune Brands Inc. (NYSE: FO) gained 15% after its late-2010 break-up announcement. We can’t help but wonder if other conglomerates and quasi-conglomerates might consider similar strategies.  That leads to reviews of General Electric Co. (NYSE: GE), United Technologies Corp. (NYSE: UTX), 3M Co. (NYSE: MMM), Honeywell International Inc. (NYSE: HON), Danaher Corp. (NYSE: DHR), Dover Corp. (NYSE: DOV), Textron Inc. (NYSE: TXT), and even a small company called Otter Tail Corporation (NASDAQ: OTTR). Lastly, what about  Berkshire Hathaway Inc. (NYSE: BRK-B)?

The company’s its board of directors unanimously approved this plan to separate into three different publicly traded companies. These are also expected to be tax-free spin-offs for its shareholders.  ITT is spinning off its water-related businesses and its Defense & Information Solutions segment.  Under the plan, ITT shareholders will own shares in all three corporations after the completion of the transaction and the company expects to complete the plan before the end of the year. ITT will continue to trade as an industrial company in aerospace, transportation, energy and industrial markets.

As a manufacturer of highly engineered industrial products and high-tech solutions: ITT’s global platform will include ITT’s current Industrial Process business, as well as its Motion Technologies, Interconnect Solutions and Control Technologies businesses. It will have an extensive portfolio of advanced technology industrial pumps, valves and control systems serving the oil and gas, mining, chemical, power generation, and pulp and paper markets. ITT will also continue in specialized and harsh-environment connectors, aerospace valves, actuators and components, shock absorbers, brake pads and other energy absorption solutions.  Nearly 60% of its revenues are from international operations and emerging markets and pro forma 2011 revenue for the future ITT Corporation is estimated at $2.1 billion.

A global water technology leader: A standalone water technology corporation will be here with a new corporate brand name will be formed through the combination of three of ITT’s current businesses: Residential & Commercial Water, Flow Control and Water & Wastewater (including biological, filtration and disinfection treatment and analytics). The portfolio will span the transport, testing and treatment of water and will focus on residential, commercial, municipal, agricultural, construction, building services, dewatering, beverage and leisure marine markets, as well as analytical instrumentation for water and wastewater, environmental, medical and beverage applications. Approximately 55% of the water unit’s revenues come from international markets and it shows strong emerging market growth prospects.  Pro forma 2011 revenue for the future water technology business is estimated at $3.6 billion.

A highly engineered defense technology and information solutions provider: The existing Defense & Information Solutions segment will be renamed and rebranded as a new company servicing the global military, government and commercial customers; and products and services will include next generation night vision, integrated electronic warfare, networked communications, force protection, radar, global intelligence, surveillance and reconnaissance systems, composite structures, space-based satellite imaging, weather and climate monitoring, and navigation and imaging systems, as well as maintenance, engineering and professional services.  Nearly 30% of revenues are already coming from adjacent markets outside of the Department of Defense, such as air traffic management, information and cyber-security as well as strong international growth prospects.  Pro forma 2011 revenue for the new defense and information solutions business is estimated at $5.8 billion.

Right before the open, ITT shares are up 20% at $63.62 after a $52.78 close.  This move may be factoring in all the great news at once.  Its pre-pop market cap was $9.7 billion and its prior 52-week range was $42.05 to $57.99.  ITT shares peaked at roughly $70 in 2007 and it is interesting that analysts had a consensus price target of only $58.81 before this action was announced.

Tyco International Ltd. (NYSE: TYC) broke itself up in 2007 and its shares are just now back at close to the same level at $43.59 today.  Tyco’s performance was, of course, affected by the Great Recession, and that makes it more difficult to compare.  Ditto for the Tyco Electronics, Ltd. (NYSE: TEL) unit.

Fortune Brands Inc. (NYSE: FO) just announced its plan for a sale or break-up in November.  In that move, its shares went from roughly $54 to $58 on the news, but shares now sit above $62.00 for a total gain of roughly 15% from start to present.

We can’t really draw a parallel between ITT and Tyco other than that their charts now look very similar if you factor in the big ITT gains from this morning.  The problem is that many of those analyst calls should consider a sum of the parts scenario and the stock is now above the consensus price target range of analysts.  That being said, it sure looks like most of the goodwill and reward is being given to shareholders all at once.

Gabelli & Co. reiterated its “Buy” rating.  What will stand out in the Gabelli call is that it lists a fair market value of $89.00 for 2011.  If that $89 target holds true, then our take that the gain is being fully realized will have an opportunity cost associated with it.  As a reminder, rising tides (i.e. the stock market) tend to lift all vessels (i.e. stocks).

Another manufacturing conglomerate is playing Devo, and there is now yet one more great special situation for value and growth investors alike.

JON C. OGG

AMR Corp. (NYSE: AMR), ArcelorMittal (NYSE: MT), Cablevision Systems Corporation (NYSE: CVC), Forest Oil Corp. (NYSE: FST), Fortune Brands, Inc. (NYSE: FO), Loral Space & Communications Holdings Ltd. (NASDAQ: LORL), Motorola Inc. (NYSE: MOT), and Northrop Grumman Corp. (NYSE: NOC) are all either planning spin-offs or are considering them.  There is also a winner so far in 2010 in The Howard Hughes Corporation (NYSE: HHC) from General Growth Properties (NYSE: GGP).  We have provided some basic information and color on each below.

1. AMR Corp. (NYSE: AMR), the parent of American Airlines, has wanted to unload American Eagle for years. What has prevented a deal has been the bad economy and high fuel prices.  It was back in the summer that AMR disclosed that it had revived plans that could ultimately lead to a sale, divestiture, or even a spin-off.  If the airline sector remains in favor this tranasaction could finally occur in 2011.  AMR shares are trading around $7.75 and the 52-week trading range is $5.86 to $10.50.  AMR peaked above $35.00 in early 2007.  If this will assist in its attempt to regain a former glory, they will likely jettison the regional unit.

2. ArcelorMittal (NYSE: MT), the international steel giant, has recently confirmed that the stainless steel business will be spun off to shareholders.  The plan is to distribute shares in the first quarter of 2011 at a ratio of one share of the stainless steel business for every twenty ArcelorMittal shares.  With shares around $37.00, its 52-week trading range is $26.28 to $49.41.

3. Cablevision Systems Corporation (NYSE: CVC) has already spun off Madison Square Garden, Inc. (NYSE: MSG) in February 2010.  Now the Dolan family is looking at the same possibility for Rainbow Media.  In November, the Dolans announced that the board of directors gave authorization to explore a possible spin-off of Rainbow Media.  If this occurs, Rainbow Media would become a separate public company with its holdings being national programming, IFC, and Rainbow Network. Cablevision shares are very close to $35.00 and its 52-week trading range is $21.53 to $35.16.

The move is creating a special situation investment which value investors and turnaround investors may be paying close attention to.

Fortune Brands’ board of directors has unanimously approved a break-up of its three consumer businesses.  Its distilled spirits is the focal point, and it will either sell or spin-off its home and security unit and its golf products business.

Fortune Brands will continue as an independent and publicly-traded company which is focused entirely on the distilled spirits business.  Fortune Brands is set to pursue a tax-free spin-off of its home and security business and that will be its own independent publicly traded stock company owned by Fortune Brands’ shareholders.  The company’s golf business is set to either be sold to a buyer or it will also have a tax-free spin-off to Fortune Brands’ shareholders.

Bill Ackman of Pershing Square Capital Management may have much to do with this move.  He took roughly an 11% stake to pressure the company to pursue this strategy.  At the time, the company may have been reviewing that strategy but you can imagine that this push was the decisive catalyst that pushed a break-up of the company’s units.

Fortune Brands closed at $61.15 on Tuesday versus a 52-week trading range of $37.05 to $62.25 and its market cap is roughly $9.3 billion.  For whatever it is worth, Fortune Brands was worth more than $80.00 per share back in 2007.

JON C. OGG

Abercrombie & Fitch Co. (NYSE: ANF) Raised to Buy with $52 Target at Argus.
BP plc (NYSE: BP) Cut to Hold at RBS.
Broadcom Corporation (NASDAQ: BRCM) Added to Conviction Buy List at Goldman Sachs.
CEMEX, S.A.B. de C.V. (NYSE: CX) Cut to Hold at Deutsche Bank.
Costco Wholesale Corporation (NASDAQ: COST) Cut to Market Perform at BMO.
EMC Corp. (NYSE: EMC) Raised to Buy and $25 target at Deutsche Bank.
First Industrial Realty Trust (NYSE: FR) Started as Underweight at JPMorgan.
Fortune Brands, Inc. (NYSE: FO) Cut to Neutral at Baird.
Rackspace Hosting, Inc (NYSE: RAX) Maintained Outperform and target raised to $26 at Oppenheimer.
RF Micro Devices Inc. (NASDAQ: RFMD) Cut to Hold at Needham.
Triquint Semiconductor, Inc. (NASDAQ: TQNT)  Cut to Hold at Needham.

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JON C. OGG

American Eagle Outfitters, Inc. (NYSE: AEO) Raised to Buy at Jefferies.
Bristol-Myers Squibb Company (NYSE: BMY) Raised to Buy at Citigroup.
China Agritech Inc. (NASDAQ: CAGC) Started as Buy at Brean Murray.
CNOOC Ltd. (NYSE: CEO) Removed from Goldman Sachs Conviction Buy List.
Constellation Brands Inc. (NYSE: STZ) Started as Buy at Citigroup.
Fortune Brands Inc. (NYSE: FO) Started as Sell at Citigroup.
Hecla Mining Co. (NYSE: HL) Started as Buy at Jefferies.
Medco Health Inc. (NYSE: MHS) Raised to Buy at Goldman Sachs.
MEMC Electronic Materials Inc. (NYSE: WFR) Cut to Sell at Hapoalim.
Sequenom Inc. (NASDAQ: SQNM) Raised to Buy at Auriga.
United States Steel Corp. (NYSE: X) Raised to Neutral from Sell at UBS.
Walgreen Co. (NYSE: WAG) Cut to Market Weight at Thomas Weisel.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Aetna (AET) Raised to Neutral at Goldman Sachs.
Amazon.com (AMZN) Raised to Buy at BofA Merrill Lynch.
America Movil (AMX) Started as Outperform at Wells Fargo.
BJ’s Wholesale (BJ) Raised to Overweight at Barclays.
Continental (CAL) Raised to Buy at Argus.
Electronic Arts (ERTS) Raised to Outperform at FBR.
Fortune Brands (FO) Raised to Buy at Goldman Sachs.
FPIC Insurance (FPIC) Raised to Outperform at Oppenheimer.
Humana (HUM) STarted as Buy at Collins-Stewart.
Marriott Hotels (MAR) Started as Buy at Citigroup.
Starwood Hotels (HOT) Started as Buy at Citigroup.

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JON C. OGG

Fortune Brands (FO) Poor results dog the stock. Down to $51.59 from 52-week high of $90.80.

AMR Corporation (AMR) Another brutal day for airlines. Sells down to $4.58 from 52-week high of $29.32.

UAL (UAUA) Ditto. Down to $4.44 from 52-week high of $51.60

Circuit City (CC) Weak retailer in weak retail market. Drops to $2.47 from 52-week high of $15.33.

Douglas A. McIntyre

The company now expects pre-charge/gain earnings to be down at a high-teens-to-mid-20′s percentage rate compared to diluted EPS of $1.51 before charges/gains for continuing operations in the year-ago quarter. This is worse than its previous forecasts of being down at a high-single-digit-to-mid-teens percentage rate.  If we maximized the warning and took a mid-20′s percentage rate, this could generate an effective EPS report of $1.13.  First Call has estimates at $1.32 currently.

It does expect that results in the second half of 2008 will be better than the first half because of company-wide productivity initiatives and increased brand-building investments. For the full year 2008, the company now expects to generate diluted EPS before charges/gains that is down at a high single-digit to high-teens percentage rate compared to $5.06 in 2007. The company’s previous full-year target was for diluted EPS before charges/gains to be flat to down at a high-single-digit percentage rate versus 2007’s results. 

If we interpolate that earnings, this could be anywhere from around $4.10 to $4.60 depending on where your starting point is.  Current First Call estimates are $4,79 EPS, so either way this is a big shortage. 

Fortune closed up marginally by $0.04 in regular trading at $62.41 today.  Shares are now down almost 5.5% at $59.00 in after-hours trading.  Go ahead and chalk that up as another 52-week low.  The prior range was $62.01 to $90.80.  So much for good old fashioned booze as being a defensive sector.

Jon C. Ogg
June 30, 2008