Frequently, these stocks will trade at a discount, as the market fails to fully price-in the value of their subsidiaries. In time, however, the market may come to value the true worth of these businesses — but smart investors may be able to get in early.
The Gap Inc. (NYSE:GPS) owns Athleta
Some investors might not realize it, but The Gap Inc. (NYSE:GPS) is several different companies rolled into one. Besides the eponymous clothing store, The Gap Inc. (NYSE:GPS) also owns Banana Republic and Old Navy.
In 2008, it acquired Athleta, adding yet another store to its portfolio. At the time, The Gap Inc. (NYSE:GPS) paid $150 million for the brand. But an analyst at Jefferies thinks it can be worth much more — $2.5 billion, to be exact. If that’s the case, once the market figures this out, investors could be looking at a potential rally of 25%.
Jefferies’ reasoning is pretty straightforward: Athleta sells women’s athletic apparel, competing directly with Lululemon. Most women hold Athleta in similarly high regard as Lululemon, but Athleta’s clothing is much cheaper. In time then, Athleta should come to dominate the market for — among other things — yoga pants.
Time Warner Inc (NYSE:TWX) owns HBO
It’s no secret that Time Warner Inc (NYSE:TWX) owns HBO. The question is, how valuable could HBO be?
Time Warner Inc (NYSE:TWX)’s current market capitalization is roughly $56 billion. The company is somewhat of an entertainment conglomerate, with a number of divisions. Yet, more than half of its revenue and almost all of its profit comes from its networks — HBO being chief among them.
Meanwhile, Netflix, Inc. (NASDAQ:NFLX) is worth about $12 billion and is currently attempting to transform itself into an online HBO.
Although Netflix, Inc. (NASDAQ:NFLX) has slightly more domestic subscribers than HBO, it doesn’t generate nearly as much cash. Also, according to Time Warner Inc (NYSE:TWX), HBO has the most loyal subscribers in the industry.
BTIG analyst Rich Greenfield called for Time Warner Inc (NYSE:TWX) to spin off HBO nearly two years ago. Unsurprisingly, that call fell on deaf ears. But as Netflix continues to bolster its subscriber base, the possibility of an HBO spin-off could rear its head again.
Jack in the Box Inc. (NASDAQ:JACK) owns Qdoba
Fast food stock Jack in the Box Inc. (NASDAQ:JACK) doesn’t seem to get nearly as much attention as Chipotle Mexican Grill, Inc. (NYSE:CMG), although perhaps it should. Besides its namesake restaurant, Jack in the Box Inc. (NASDAQ:JACK) owns Qdoba — a near direct competitor to Chipotle.
Both Qdoba and Chipotle serve what might be termed “gourmet burritos” in a very customizable fashion. Qdoba differentiates itself from Chipotle Mexican Grill, Inc. (NYSE:CMG) by offering various sauces with its burritos — queso, barbecue sauce, etc. But if Chipotle Mexican Grill, Inc. (NYSE:CMG) is McDonald’s Corporation (NYSE:MCD), Qdoba is Burger King.
Of course, not everyone is bullish on Chipotle. Both David Einhorn and Jeff Gundlach have criticized the chain, the later of which characterized the concept of a gourmet burrito as an “oxymoron.”
Still, Chipotle has continued to defy its critics in recent months. If investors like Chipotle’s concept, Jack in the Box Inc. (NASDAQ:JACK)’s Qdoba offers a similar ancillary play.
Yahoo! owns Alibaba and Yahoo! Japan
When it comes to Yahoo! Inc. (NASDAQ:YHOO), investors are really getting three companies in one. Much of the recent media coverage has focused on CEO Marissa Mayer and her attempts to turn around Yahoo!’s core business, along with speculation over possible acquisitions.
But, much more important to Yahoo! Inc. (NASDAQ:YHOO)’s investors are the company’s stakes in Alibaba and Yahoo! Japan. Yahoo! owns roughly 24% of China’s Alibaba group and 35% of Yahoo! Inc. (NASDAQ:YHOO) Japan. Analysts at Bank of America recently upgraded the stock, giving it a Buy rating and $28 price target. That upgrade was largely predicated on hope for Yahoo!’s Asian assets.
Alibaba has been growing increasingly valuable in recent months, while Yahoo! Japan is — like other Japanese companies — being helped out by the nation’s new aggressive monetary policy.
Whatever Mayer does or does not do to turn around core Yahoo! may not matter much if the company’s Asian assets continue to appreciate in value.
Sum of the parts
When picking stocks, investors should always consider the individual parts of a company, as well as the whole. The core business of a company might be stagnant or boring, but a hot subsidiary could offer the potential for real growth.
The article These Companies Have Valuable Subsidiaries and Few People Realize It originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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