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Company Overview: ITT Corporation (NYSE:ITT) designs, manufactures and sells a range of engineered products and provides related services worldwide. The company's defense segment provides a range of information, situational awareness and electronic warfare systems for multiple military aircraft, surface ships, submarines and ground vehicles; systems integration, communications, engineering and technical support solutions; a range of research, technologies and engineering support services to government, industrial and commercial customers; and systems support solutions for combat equipment, tactical information systems and facilities management. This segment also offers wireless networking systems for tactical military and government systems; hardware and software for the U.S. government, law enforcement agencies and commercial use; night vision equipment; and remote sensing and navigation solutions to customers in the defense, intelligence, space science and commercial aerospace communities.

Valuation: ITT is up a little over 20%, including dividends, since I first wrote about it back in August. ITT is selling at approximately 12 times this year's consensus earnings and less than 11 times next year's projected earnings. The dividend yield is 1.7% and ITT sells less than 1 times revenues.

Catalyst: ITT has announced that it will split up into three companies: an industrial process and control technology company that will retain the ITT name, a water company and a defense company. I believe the management has concluded correctly that this will unlock value by allowing each company to focus on its core business and rid itself of its "conglomerate" discount. So what is each part of the company worth?

1. ITT – The company that will retain the ITT name will be a $2.1B revenue industrial products firm that will provide motion and control technologies as well as interconnect and industrial process solutions. This company will get over 50% of its sales from overseas and 30% from fast growing emerging markets. Its primary customers are in oil and gas, automotive, aerospace and rail. Spinoff of its other two businesses will allow management to concentrate on site rationalizations, improving productivity and cost control. Revenues are projected to grow 10% in 2011. Given its opportunities in emerging markets, to rationalize its cost structure and projected revenue growth; a valuation of 1.4 times sales seems reasonable. Flowserve (NYSE:FLS), which operates in similar markets, is priced at 1.7 sales with projected 9% revenue growth. Value: $2.8B

2. Water- This $3.6B revenue firm will provide water equipment services, instruments and materials, water and waste management services to municipal, residential and commercial users. Over 50% of its revenues come from overseas. It is growing smartly with a double digit revenue growth rate in 2010 and is projected to grow sales over 10% in 2011. It has a large installed base and growing presence in emerging markets. It has made some recent acquisitions that should enhance its product line, especially in analytical instrumentation. Given this division's revenue growth, total water solutions and the growing need for water, especially in emerging markets, I believe this company is conservatively worth 1.5 times revenues. Value: $5.4B

3. Defense – It's a leader in night vision equipment and air traffic control technology. Revenues have been flat but orders did increase 26% last quarter. Given the high probability of defense cuts, this industry is currently challenged. Luckily, the division's product mix of high tech products that are not tied to large weapons programs should serve it well. Let's start with valuation of 1 times revenues given unknowns in the defense industry and add a 10% premium for increased focus on costs and productivity that usually accompany an entity that has been spun off from its corporate parent. Value: $6.3B

Recommendation(s): A conservative breakdown of the three entities that ITT will become after spinoffs produces a value of $14.5B, or over 35% above ITT's current market value of $10.5B. Strong Buy.

Source: After Spin-Offs, ITT Has 35% Upside